This report features world capital market performance and a timeline of events for the past quarter and the past year. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.

The report also illustrates the impact of globally diversified portfolios and features a quarterly topic.

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QUARTERLY AND ANNUAL MARKET REVIEW

It’s not enough to diversify by security. Deeper diversification involves geographic and asset class diversity. Holding a global portfolio helps to lower concentration in individual securities and increase diversification.

Over long periods of time, investors can benefit from consistent exposure in their portfolios to both US and non-US equities. While both asset classes offer the potential to earn positive expected returns in the long term, they may perform quite differently over shorter cycles. The performance of different countries and asset classes will vary over time, and there is no reliable evidence that performance can be predicted in advance. An approach to equity investing that uses the global opportunity set available to investors can provide both diversification benefits as well as potentially higher expected returns.

The global equity market is large and represents a world of investment opportunities. Nearly half of the investment opportunities in global equity markets lie outside the United States. Non US stocks including developed and emerging markets, account for 47% of world market cap and represent more than 10,000 companies in over 40 countries. A portfolio investing solely within the US would not be exposed to the performance of those markets.

However, when Americans talk about the stock market, they’re generally referring to the Standard & Poor’s 500 index or the Dow Jones industrial average. But these indices represent only one part of the available investing universe. The total U.S. stock market makes up only about 53% of global market capitalization. Yet, on average, U.S. mutual fund investors possess a home bias, with a disproportionate amount of their portfolio invested in the United States. If their portfolios were balanced according to world market capitalization, about half of their assets would reside in non-U.S. stocks. This “home bias” leads to less diversification, and as a result, greater volatility with lower returns.

It’s well know that concentrating in one stock exposes you to unnecessary risks, and diversifying can reduce the impact of any one company’s performance on your wealth. From year to year, you never know which markets will outperform, and attempting to identify future winners is a guessing game. Diversification improves the odds of holding the best performers, and by holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

Put very simply, DIVERSIFICATION:

·         Helps you capture what global markets offer

·         Reduces risks that have no expected return

·         May prevent you from missing opportunity

·         Smooths out some of the bumps

·         Helps take the guesswork out of investing

There is no single perfect portfolio. There are an infinite number of possibilities for allocation based on the needs and risk profile of each individual. The most important question investors should ask… “IS MY PORTFOLIO GLOBALLY DIVERSIFIED?”

Throughout history, many of the greatest advancements in finance have come from Academia. Our investment philosophy has been shaped by decades of research by leading academics. We structure portfolios on the principles that markets are efficient; that returns are determined by asset allocation decisions, and that portfolios can be structured around dimensions of expected returns identified through academic research. It is through our strategic partnership with Dimensional Fund Advisors, a leading global investment firm that has been translating academic research into practical investment solutions since 1981,  that we can pursue dimensions of higher expected returns through advanced portfolio design, management, and trading. 

Much of what we have learned about expected returns in the equity and fixed income markets can be summarized in these dimensions.

1. Stocks have higher expected returns than bonds – it has been well documented over time that stocks outperform bonds, and that risk = reward
2. Among stocks, expected return differences are largely driven by company size – small companies have higher expected returns than large companies.
3. Relative price – low relative price “value” companies have higher expected returns than high relative price “growth companies.
4. Profitability – companies with high profitability have higher expected returns than companies with low profitability.

Since 1981, Dimensional has incorporated rigorous academic research on the capital markets into the design, management, and trading of clients’ portfolios. Some of the major milestones in academic research shown in the chart below have had a profound effect on our investment philosophy.

Our enduring philosophy and deep working relationships with Dimensional and the academic community underpin our approach to investing. Over a long period of time, Academics have been able to identify dimensions of higher expected returns, and with Dimensional, we can structure portfolios around these dimensions in a very cost-effective manner.

Information provided by Dimensional Fund Advisors LP.

US size premium: Dimensional US Small Cap Index minus S&P 500 Index. US relative price premium: Fama/French US Value Index minus Fama/French US Growth Index. US profitability premium: Dimensional US High Profitability Index minus Dimensional US Low Profitability Index. Dev. ex US size premium: Dimensional Intl. Small Cap Index minus MSCI World ex USA Index (gross div.). Dev. ex US relative price premium: Fama/French International Value index minus Fama/French International Growth Index. Dev. ex US profitability premium: Dimensional International High Profitability Index minus Dimensional International Low Profitability Index. Emerging Markets size premium: Dimensional Emerging Markets Small Cap Index minus MSCI Emerging Markets Index (gross div.). Emerging Markets relative price premium: Fama/French Emerging Markets Value Index minus Fama/French Emerging Markets Growth Index. Emerging Markets profitability premium: Dimensional Emerging Markets High Profitability Index minus Dimensional Emerging Markets Low Profitability Index. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. See “Index Descriptions” for descriptions of Dimensional and Fama/French index data. Dimensional Fund Advisors LP. The S&P data is provided by Standard & Poor’s Index Services Group. MSCI data © MSCI 2016, all rights reserved.

Education planning is a complex issue. A disciplined approach to saving and investing can help remove some of the uncertainty from the planning process. With the increasing price tag of higher education, talking to your advisor about investment vehicles for college is crucial.

Check out this in depth look by Dimensional Fund Advisors at planning for higher education, and contact us if you want to know more about the significant benefits of funding a 529 before the December 31st deadline.

Back to School

Making investment decisions based on the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome will likely be the result of random luck. At worst, it can lead to costly mistakes. This presentation takes a historical look at how major US, international developed, and emerging markets indices have performed during or after a US presidential election.

Market Returns During an Election Year

The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets throughout the world have provided growth of wealth that has more than offset inflation. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk. The chart above shows how the growth of $1 is affected by the level of risk an investor is willing to take. It also shows that any level of risk taken has historically outpaced inflation.

Many investors and investment managers strive to beat the market by taking advantage of pricing “mistakes” and attempting to predict the future. Too often, this proves costly and futile, due to holding the wrong securities at the wrong time, meanwhile, markets are succeeding. Instead of allowing the media to sway you into making impulsive and reactive decisions about your investments, or gambling on hunches, why not let the markets work for you?

When you try to outwit the market, you compete with the collective knowledge of all investors. By harnessing the market’s power, you put their knowledge to work in your portfolio. Markets integrate the combined knowledge of all participants, and enables competition among those who voluntarily agree to transact. We believe that all of this powerful information drives security prices to fair value, and that differences in performance are largely attributed to asset allocation decisions, and differences in average risk.

We know that investing in the market means taking risks. We also know that not investing means taking risks, because your money today will buy less in the future. We want investors to incorporate the vast, complex network of information, expectations, and human behavior that we believe markets reflect, into their portfolio design. This powerful view of market equilibrium has profound investment implications.

This report features world capital market performance and a timeline of events for the past quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.

The report also illustrates the performance of globally diversified portfolios and features a quarterly topic: Presidential Elections and the Stock Market.

Quarterly Market Review

The decision to take a loan out against a 401(k) needs to be well thought out. It is tempting to look at the stack of funds sitting there in the company 401(k) plan, and think of it as your own piggy back to borrow against.  It’s very important to remember that these funds are supposed to help support a retirement that could last 30 years or longer. A wrong move can have lasting and devastating consequences. I recently had a client just ask about taking a loan against his plan to fund a down payment of a new home. There are several key points we considered:

Pros

Taking out a loan against your 401(k) is a very simple process and can be done quickly. Most plans offer online access to set-up and process loans.  So in need of quick cash to close the home, this is an easy solution. In addition, if you have bad credit, the interest rate is usually favorable since you are basically paying yourself back.   Of course, this is much better than high interest credit cards or other sources.  Most loans have a 5-year payment term, but for a first-tome home buyer, it is usually 10 years. This can help lower the repayment amount per paycheck.

Cons

This is where we have to discuss human behavior. You have to be very careful when taking out a loan.   If you need a loan, that tells me you might not be saving outside of the 401(k) for the down payment. If this is because money is tight, adding another loan to repay may make things worse. Developing and focusing on a savings strategy might be more appropriate. Also, it is tempting to stop your contributions if you have an outstanding loan, so you will lose on the pre-tax contributions and company match benefits. This is a huge retirement savings opportunity that is gone and lost forever. Finally, if you leave your job you usually have to repay the entire loan quickly which could lead to other bad financial decisions, as well as limiting your career options if you feel you can’t leave your company. If you do leave and the loan is not repaid, the loan is declared a withdraw, and taxes and penalties are due. 

In general, the pros and cons really need to be considered in the decision making process. While a quick fix for needed cash, most of the time we would like to consider other options or strategies instead of a 401(k) loan.

(Research above shows only 20% of all active mutual funds beat their corresponding index over a 10 year time frame.  And of those, only 37% continued over the next 5 years. This is only 205 of 2758 mutual funds that beat their index over a 15 year time frame.  It’s nearly impossible to pick the right ones)

Some investors select mutual funds based on past returns. However, funds that have outperformed in the past do not always persist as winners. The most important guideline to remember is: If a fund does not fit into your overall investment strategy, it’s a dangerous choice no matter how it’s performed in the recent past.

Investors have a tendency to weight recent events more heavily than history. It’s nearly impossible for the typical investor to choose a fund that had negative returns in the previous year. Yet that fund, historically, may have proven to be an outperformer in its category. And the largest hurdle is that most investors don’t even think they are chasing performance. Research shows, however, that nearly every mutual fund outperforms individual investors in the fund.

Instead of chasing performance, investors should follow on these 4 rules:

1. Develop an investment strategy and COMMIT to it

Every investor should have a disciplined investing strategy and stick to it, through bull and bear markets. A relationship with a professional financial advisor is the first step to developing this strategy, and it insures that you’ll take the right actions at the right time.

2. Rebalance your portfolio

Rebalancing your portfolio will keep you from buying high and selling low.  Investors who chase returns, are adding to a piece of the investment pie that’s already too big. If you rebalance your portfolio once a year, you’ll be insured that you’re adding to the smaller piece of the pie, and inherently buying low and selling high.

3.  Remain Invested

Don’t be tempted to pull your investments from the market when it falls. These are the most opportune times to increase long-term returns through rebalancing.

4. Focus on your personal goals

Your personal goals should drive your investing strategy. Keep that in the front of your mind and it will be much easier to remain disciplined.

Remember, past performance alone provides little insight into a fund’s ability to outperform in the future. A more disciplined approach has proven to be the best way to increase-long term performance.