QUARTERLY MARKET REVIEW – Q2 2019
Click on the link below for a detailed analysis of quarterly performance of the global equity and fixed income markets.
CLICK HERE TO READ THE 2ND QUARTER 2019- QUARTERLY MARKET REVIEW
Retirement Insights Tip #2: Longevity Risk – How can we Prepare?
Life expectancies in the United States continue to increase as more people are living to older ages than ever before.
Investors need to plan on the probability of living much longer – even 30+ years in retirement. It’s important to invest a portion of your portfolio for growth to maintain purchasing power over longer periods of time.
Discuss a Distribution Strategy with your financial advisor. Outliving your money is a real concern for many investors. If you are in good health, or have a family history of longevity, you much plan for living beyond average!
This chart shows the probability that 65-year-old men and women today will reach various ages. For a 65-year-old couple, there is nearly an even chance that one of them will live to age 90 or beyond.
RETIREMENT INSIGHTS TIP #1 – SAVE AND INVEST EARLY!
HOW EARLY AND FOR HOW LONG?
Make saving for retirement a priority by investing early and often. This graph illustrates the savings and investing behavior of four people who start saving the same annual amount at different times in their lives, for different durations and with different investment choices.
Be Consistent! Start Early! Be A Disciplined Investor!
The power of compounding is key to success! You have to participate in the markets to be rewarded! Investing in tax sheltered vehicles can lead to even greater wealth. Stay tuned for discussions on savings rates and Qualified v. Non-Qualified. Today’s take away – start investing NOW and determine a level of risk that is acceptable to you!
Retirement Insights Series
THE RETIREMENT EQUATION
A sound retirement plan is to make the most of the things that you can control but be sure to evaluate factors that are somewhat or completely out of your control within your comprehensive retirement plan.
Investment efforts are best directed toward areas where we can make a difference and away from things we can’t control. We can’t control movements in the market. We can’t control news or financial headlines. No one can reliably forecast the market’s direction or predict which stock or investment manager will outperform.
But each of us can control how much risk we take. We can diversify! We do have a say in the fees we pay. We are in charge of our savings rate and spending, and we can exercise discipline when our emotional impulses threaten to blow us off-course.
This can be difficult for most people, because we are pushed toward fads that the financial marketing industry decides are sellable, which require us to constantly tinker with our portfolios.
That’s why we’ve created a Retirement Insights Series help you focus to the controllable things. Breaking down the road to retirement one step at a time! Stay tuned for a new topic each week in the series!
Trillion Dollar Club
For 20 years, we have utilized Dimensional Fund Advisors to facilitate intelligent product selection, and our philosophy parallels their approach of information based, efficient investing.
The Financial Times recently sat down with Dimensional Co-CEO and Chief Investment Officer Gerard O’Reilly. The interview covers O’Reilly’s path to Dimensional, his leadership alongside Co-CEO Dave Butler, and the firm’s research-based culture and approach to investing.
An interesting piece about one of DFA’s own, and his path to Dimensional. Read below or click HERE to go directly to Dimensional’s Web site.
dimensional-eyes-the-fund-sectors-trillion-dollar-club
The Randomness of Global Equity Returns
Investment opportunities exist all around the globe.
Across more than 40 countries, there are over 15,000 publicly traded companies. If you listen to the news, however, some countries may seem like better places to invest than others based on how their economies and stock markets are doing at the time. Fluctuations in performance from year to year only add to the complexity, providing little useful information about future returns.
Daunted by the prospects of sorting it out, some investors look to the place they know best—their home market. There can be good reasons, such as tax benefits, for prioritizing an investment close to home, but too much home bias could mean underweighting or missing out on part of the investment universe.
Australia, for example, represents 2% of the global equity market. An Australian who aims to build a global equity portfolio may have cause for investing a greater amount at home. However, this would come with the tradeoff of reduced investment in other countries. The same is true for a Japanese investor, whose home country represents 8% of the global equity market. Even the US equity market—the world’s largest by far—is only about half of the global opportunity set.
Fortunately, no one needs to be an expert in every region to benefit from the opportunities those regions present. Equity markets process information continuously, leveraging knowledge from millions of buyers and sellers each day as they set security prices. Investors can trust market prices to provide an up-to-the-minute snapshot of global investment opportunities.
Because prices do such a good job incorporating information about securities in every market, they also offer the best prediction of future prospects. No sensible story or compelling empirical research suggests investors can consistently outguess those prices and pick winning countries. A well-diversified global portfolio can help capture the returns of markets around the world and deliver more reliable outcomes over time.
Reading the checkerboard
The tables in Exhibit 1 illustrate 20 years of annual equity returns for developed and emerging markets. Each color represents a different country. Each column is sorted top down, from the highest-performing country to the lowest.
Taken together, these tables powerfully demonstrate the randomness of global equity returns. In either table, pick a color in the first column and follow it through to the right. Does any country seem to follow a pattern that gives clues about its future performance?
Exhibit 1 – Annual Returns
1999–2018
Past performance is no guarantee of future results. MSCI country indices (net dividends) for each country presented. MSCI data © MSCI 2019, all rights reserved.
Consider the performance of the US and Denmark, shown in Exhibit 2. Is it immediately clear which country had the higher return over the past two decades?
Denmark, in fact, was the best performer among all developed markets, with an annualized return of 9.1%. Surprisingly perhaps, Denmark had the best calendar year return only once, in 2015. The US, despite some strong returns in the last several years, placed ninth overall with an annualized return of 4.9%. Bear in mind, Denmark represents less than 1% of the global market cap available to investors.
Exhibit 2 – Who Performed Better over the 20-Year Period?
Past performance is no guarantee of future results. MSCI country indices (net dividends) for each country presented. MSCI data © MSCI 2019, all rights reserved.
From first to worst
Denmark also provides an example of the unpredictability in short-term results. After posting the highest developed market return in 2015, Denmark had the lowest return in 2016. Countries have also moved in the opposite direction, from worst to first, in consecutive years. In 2000, New Zealand had the lowest return among developed markets followed by the highest return in both 2001 and 2002. In emerging markets, Hungary and Russia went from the bottom two performers in 2014 to the top two performers in 2015.
Going to extremes
In a single year, the difference between the return of the highest-performing country and the lowest can be dramatic, as shown in Exhibit 3. Among developed markets over the last 20 years, the difference between the best and worst performers has ranged from a low of 24% in 2018 to as much as 81% in 2009. The differences in emerging markets are even more pronounced, ranging from 39% in 2013 to 160% in 2005. In fact, the difference in emerging markets has exceeded 100% in several years.
These extreme differences in outcomes, combined with the examples of countries that experienced sharp reversals in their return rankings, highlight the risk of trying to predict future returns by looking at the past and emphasize the importance of diversification across countries.
Exhibit 3 – Return Differences
Past performance is no guarantee of future results. MSCI country indices (net dividends) for each country presented. MSCI data © MSCI 2019, all rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Now, the good news
This evidence of the randomness in global equity returns, though, is not bad news for investors. Rather than trying to guess which country is going to outperform when, investors committed to a well-structured, globally diversified portfolio are better positioned to capture the performance of the global markets, where and when it occurs.
Over the last 20 years, every dollar invested in a globally diversified strategy, shown by the Dimensional Global Market Index in Exhibit 4, nearly tripled.
A globally diversified approach can deliver more reliable outcomes over time with less volatility than investing in individual countries. This can help investors stay on track, through all kinds of markets, toward their long-term goals.
Exhibit 4 – Growth of $1
1999–2018
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Data presented in the Growth of $1 chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The charts are for illustrative purposes only and are not indicative of any investment. See disclosures for more information on the Dimensional Global Market Index.
| Source: Dimensional Fund Advisors LP. |
May Performance Dashboard
In stark contrast to the strong performance during the first four months of 2019, U.S. equities suffered in May as a result of trade tensions between the U.S. and China along with slowing global growth concerns. The S&P 500® lost 6%, while the S&P MidCap 400® and S&P SmallCap 600® lost 8% and 9%, respectively. The VIX® ended the month at 18.7, still surprisingly low by historical standards.
The market struck a defensive tone, with Low Volatility taking the lead. Across sectors, Real Estate was the top performer and sole sector with positive performance, while Energy languished from the weakness in oil prices.
International markets also posted losses, with the S&P Developed Ex-U.S. BMI and the S&P Emerging BMI down 5% and 6%, respectively.
dashboard-us-2019-05
The Uncommon Average
The US stock market has delivered an average annual return of around 10% since 1926.[1] But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?
Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 Index had a return within this range in only six of the past 93 calendar years. In most years, the index’s return was outside of the range—often above or below by a wide margin—with no obvious pattern. For investors, the data highlight the importance of looking beyond average returns and being aware of the range of potential outcomes.
Exhibit 1: S&P 500 Index Annual Returns
1926–2018
In US dollars. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.
TUNING IN TO DIFFERENT FREQUENCIES
Despite the year-to-year volatility, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, and 10 years in the US market. The data show that, while positive performance is never assured, investors’ odds improve over longer time horizons.
Exhibit 2: Frequency of Positive Returns in the S&P 500 Index
Overlapping Periods: 1926–2018
In US dollars. From January 1926–December 2018, there are 997 overlapping 10-year periods, 1,057 overlapping 5-year periods, and 1,105 overlapping 1-year periods. The first period starts in January 1926, the second period starts in February 1926, the third in March 1926, and so on. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.
Conclusion
While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. By thoughtfully considering these and other issues, investors may be better prepared to stay focused on their long-term goals during different market environments.
Understanding how mutual funds work could save you a ton of money in the long run!
Investors should get to know the 18.7 Trillion Dollar industry of mutual funds! Check out this video and get the basics on mutual funds!
April Performance Dashboard
U.S. equities gained steam in April, powered by positive earnings, potential progress in U.S./China trade talks, and recent dovish sentiment from the Fed. The S&P 500®, the S&P MidCap 400® and S&P SmallCap 600® all gained 4%, and the VIX® declined to 13.12.
All U.S. equity factors rose in April, with High Beta and Enhanced Value taking the lead. Across sectors, Financials and Communication Services were the top performers, up 9% and 7%, respectively, while Health Care was the laggard.
International markets also posted gains, with the S&P Developed Ex-U.S. and the S&P Emerging BMI up 3% and 2%, respectively.