Monday, April 13, 2015

To every season turn, turn, turn

We New Englanders are very eager for the onset of spring after a long and difficult winter. With its promise of rebirth and rejuvenation, spring is just the change we need. But the new season is not the only notable change we are seeing.  

Those of you who have been long-term clients may be surprised to find another letter accompanying your Quarterly Performance Reports. You know we don’t usually like to draw too many conclusions from short-term market conditions, preferring instead to focus on your long-term financial plans. However, sometimes we feel compelled to comment, as we do now.

Our 2014 year-end commentary concentrated on our sustaining belief in the value of global diversification and the interpretive problems associated with comparing short-term performance to a single benchmark like to S&P 500.  The S&P 500 did in fact have a great 2014, whereas most other asset classes were lackluster or even negative, as was the case with international stocks.  However, it makes an interesting story to see how the tables have turned in the last quarter back in favor of the globally diversified investment portfolio. 

The table below shows that, through December of 2014, the Dimensional domestic and international portfolios we use significantly trailed the S&P 500 for all periods of 2014, although Dimensional’s domestic funds had a better three year performance, and their international funds did return a respectable 11.4% per year despite all of the doom and gloom about Europe.

The column on the far right shows that, in the first quarter of 2015, there has been a complete reversal of fortune, with Dimensional’s international funds performing best and the S&P 500 performing worst.  This is not surprising in the least to us, and it illustrates how markets behave.  Performance leadership across asset classes invariably changes, and these changes do not occur in a predictable manner.  This fact is one of the compelling reasons we don’t deviate from our asset allocation plans during market upturns and downturns and why we don’t attempt to “time the market”. 

Unfortunately, we have no way of knowing what will happen with global stock markets in the next quarter or beyond -- nor do we believe anybody else does despite what some may say.  But it’s always interesting to see how quickly circumstances can change, and it reinforces our conviction that we shouldn’t try to make predictions about the future based on short-term events of the past.  In the future, we will most certainly see periods of negative returns and changes in performance leadership across the various assets classes.  When we do, please remember that we invest according to a long-term plan targeting a realistic return goal and focusing on broad diversification and low cost. ~FSB