During the last quarter, the best performing asset classes were short-term bonds, U.S. small value stocks, and U.S. small stocks. The following chart shows the year-to-date, 10-year, and 20-year performance of many DFA funds (representing different asset classes) compared to the S&P 500 Index:
Market Returns for the period ending September 30, 2022
| DFA Fund / Index | Year-To-Date Return | 10 Year Return* | 20 Year Return* |
| S&P 500 Index | -23.87 | 11.70 | 9.84 |
| DFA World Core Equity | -23.76 | 7.65 | N/A |
| DFA U.S. Large Value | -17.38 | 9.79 | 9.24 |
| DFA U.S. Small | -21.48 | 9.42 | 10.33 |
| DFA U.S. Small Value | -14.96 | 9.08 | 10.25 |
| DFA Real Estate (REITs) | -27.79 | 6.90 | 9.03 |
| DFA Int’l Large | -25.80 | 3.83 | 6.06 |
| DFA Int’l Large Value | -19.07 | 3.57 | 6.75 |
| DFA International Small | -29.53 | 5.03 | 8.60 |
| DFA Int’l Small Value | -24.37 | 4.89 | 8.78 |
| DFA Emerging Markets | -24.48 | 1.46 | 9.17 |
| DFA 5-Year Global Bonds | -7.32 | 0.65 | 2.33 |
| DFA Inflation Protected Bonds | -13.93 | 11.70 | N/A |
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
Stocks and bonds started off the third quarter of the year with a positive July only to give back those returns in August and lose additional ground in September. The global stock market** finished down 6.99% and the bond market* finished down 4.66% for the quarter. The global stock market is now down 25.56% for the year. With both stocks and bonds down, it has proven a difficult year for even diversified investors.
Inflation and the Federal Reserve raising interest rates have continued to be the main drivers of stock and bond market direction. It appears the markets are anxiously waiting for data that indicates a cooling off of inflation, followed by the hope that the Federal Reserve will take their foot off the pedal and slow down or stop raising interest rates. There may be cause for optimism on that front as the Bloomberg commodity index was down approximately 18% from its June 2022 high. If this translates into lower inflation, then we should see it in the coming month’s economic reports.
One big positive coming from the dramatic increase in interest rates is the expectation that returns for our bond holdings will be much higher going forward. For example; the 2-year US treasury bond was yielding .73% annual interest at the beginning of 2022 and is now yielding 4.16%. That is almost six times more annual interest for the same investment! On that same note, interest rates on savings accounts and money market funds have risen dramatically as well. We are seeing online savings accounts yield up to 2.70% and 1-year CD rates approaching 4.10%. US treasury bills are yielding even more than that.
Now, let’s take a moment to talk about risk and reward. There is a reward for investing in stocks, and a risk that must be borne in order to reap that reward. So far this year, investors have experienced that risk, just as they did in 2008 during that financial crisis, and in 2000-01 during the tech crash, and in every downturn over the past 200 years. Every one of those risk periods was followed by a reward period. U.S. stocks gained over 100 percent after 2008. They did even better in the four years after 2000-01. They will eventually go up again after this period of great economic uncertainty and market volatility ends.
So, the key to investment success, in addition to having a diversified portfolio, is to be patient and give the markets time to recover. It usually takes anywhere from 3 months to 3 years to come out of a bear market, but it averages about one year or less in most cases. Keep a positive outlook and remember that the global stock markets will always recover, so you don’t need to worry about that.
Finally, just as a reminder, Nazneen (Naz) and I will be getting married on November 12th, 2022 in Costa Rica. Our honeymoon will be in Cancun, Mexico following our wedding. So, we will be out of the office from November 5th – November 30th, 2022. As you might expect, we will be “off-the-grid” during this period and will only be responding to urgent matters during our wedding/honeymoon period. I will have my laptop and cell phone with me and will continue to do trading and respond to time sensitive tasks during this period. Also, please allow a bit more time for responses to emails, as we may have days where we do not have reception.
As always, we appreciate the trust you have placed in us and look forward to helping you meet all of your goals in the future.
Enjoy the beautiful fall weather and the holidays that follow!
*As measured by Vanguard Total Bond Market (VBTLX)
**As measured by Vanguard Total Stock Market (VTWIX)
About Christopher Jones
Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.
