Video series: What’s the upside of risk?
In this short video, Nobel laureate Eugene Fama discusses how financial markets work, what fuels innovation, and the upside and downside of risk.
July Performance Dashboard
After a record June, U.S. equities continued to post gains, thanks to strong earnings and economic growth. Dovish sentiment from the Fed was short-circuited on the final trading day of the month. Despite a well-telegraphed 25 bps reduction in the target federal funds rate, the trajectory for future rate cuts remains uncertain. Large, mid and small-caps gained, with the S&P 500®, S&P MidCap 400® and S&P SmallCap 600® all up 1%.
- Enhanced Value was the top performing factor, and has outperformed the S&P 500 in 6 out of the past 12 months. Across sectors, Communication Services was the top performer, while Energy was the laggard.
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International markets posted losses, with the S&P Developed Ex-U.S. and the S&P Emerging BMI both down 1%, with headwinds including U.S. dollar strength.
Retirement Insights Tip #6 – Changes in Spending
Spending habits change over time. Typically, spending peaks at the age of 45 and starts a slow decline. This is an important piece of the retirement planning puzzle. We often talk about distribution strategies at retirement age. A solid estimate of spending is necessary to strategize for your future.
This chart illustrates what college-educated households spend on major expenditures at specific ages. Most Americans’ peak spending years are between ages 45 and 54, and thereafter spending tends to lower at older ages. Note that the largest expenditure category at all ages is housing, while the category that older people spend significantly more on than younger people is health care.
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Video series: Why Should I Invest?
In this first short video, Nobel laureate Eugene Fama explains two key steps to investing: knowing why you want to invest and understanding your tolerance for risk. Everyone has different reasons for investing and different risk aversions. Stay tuned for our 3 part series on risk, rewards and markets.
Retirement Insights Tip #4 – Retirement Savings Checkpoints!
2019 Guide to Retirement
Achieving a financially successful retirement requires consistent savings, disciplined investing and a plan, yet too few Americans have calculated what it will take to be able to retire at their current lifestyle. This chart from JP Morgan Asset Management ( for household incomes of $100,000 or more) helps investors to quickly gauge whether they are “on track” to afford their current lifestyle for 30 years in retirement based on their current age and annual household income. This analysis uses an appropriate income replacement rate (detailed on slide 15), an estimate of how much Social Security is likely to cover and the rate of return and inflation rate assumptions detailed on the right to determine the amount of investable wealth needed today, assuming a 10% gross annual savings rate until retirement. It is important to note that this analysis assumes a household with a primary earner who plans to retire at age 65 when the spouse is assumed to be 62. If an investor’s current retirement savings falls short of the amount for their age and income, developing a written retirement plan tailored to their unique situation with the help of an experienced financial advisor is a recommended next step.
Call our office for a complimentary Retirement Savings and Distribution review.
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 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. |