The reality is this; When our Creator was giving out gifts and talents, h/she provided us many, but patience was most assuredly not one of them. Thus let us begin this letter with my exhortation to you to learn a hard lesson from us; Patience in financial markets is what will keep you from being a wounded patient due to them.
You invest to make money; that’s one of our primary jobs for you. So that we don’t conveniently skirt the issue, if you would look at your investments from the beginning of the year until now, you’d rationally wonder if I’m doing my job?? It is true you’re not down 20%, but you’re not up 5-8% either. The rational concern you might have is “Am I going to be okay, will my retirement be okay, if my investments are flat?” Therefore, let’s talk about it.
Final market performance numbers from 2015 are less than 24 hours away, but given the Dow Industrials is down by 100 points as we write, we feel it safe to note that investment results for the past 12 months are almost uniformly flat to down around the world. As of yesterday, year-to-date the S&P is down a smidgen[i], International Developed countries large companies down a tad worse than that (though small cap guys are up), and Emerging Markets are almost uniformly down as many of them are commodity or export oriented[ii]. We did some research and if we pull a globally diversified portfolio from ANY of the large money managers that are NOT Dimensional (Vanguard, Blackrock[iii], etc. so that we’re not being biased) we see YTD results are less than 1% gain at best (and that data is of November 30th 2015, when markets were higher than now) to down 1-3% on their own target date funds. Thus, it would not matter where you are invested, and you’re not alone. FACT I.
Second, the performance metric of your benchmark fixed income investments (the Barclays Capital Global Aggregate Bond) is down 1.04% as of yesterday[iv]. The majority of your fixed income funds are up (3 out of 4)[v]. You will remember that we stayed high-quality, and short in duration on your bonds. High Yield bonds (with those alluring higher rates) that are sold as ‘providing income and safety’ bombed on the later aspect and are down themselves 4-17%[vi] this year. Master Limited Partnerships, those enticing energy sector (oil / gas) products that were sold in the industry by the buckets-full over the past 3 years because of their very attractive ‘yield’, lost 22-46%[vii] in 2015. You did not ‘performance chase’ and you did not get hurt. FACT II.
Fact III: Notwithstanding it is true, all the above is irrelevant. I could pull out charts by handful to explain the last year or two, but it does not matter. Only two things matter; Do you have a plan, and are we staying on it? Your plan, with us, is to believe in the power of capitalism and let it carry the heavy load while you reap the benefits. There is no reason to believe equity market returns will not be 6-9% over the next 20-30 years (and that’s uniformly 2% less per year than it has been over the prior 30[viii]). We are simply seeking those returns. Fixed income returns will be more muted (with or without the nugatory effects of the Fed’s step to ‘courageously’ raise the rate from 0.25% to 0.50% — who cares?) and maybe generate 2-5% over the next 4 years. Those returns DO NOT happen every year, and we have 80-100 years of information to show that is also true, but they do happen over the long term.
Lastly, you need to understand that one of the three critical and substantive behavioral traits necessary to good investing results is patience. Even professional managers of billion dollar pension funds routinely switch unwisely, where the fund they elect to replace does better in the next 5 years than the new one they added. That is how they get hurt, hurt their investors, and turn into ‘patients’ because they lacked ‘patience’. It is counter-intuitive, but poor results in the international markets in the past two years bode better for heightened performance in the years ahead than it bodes poorly. I’m not saying that pending better performance is in 2016 because forecasting is a fool’s game, but sooner or later the phenomena called ‘regression to the mean’ occurs. When it happens, however, you have to be in the market to get it. That’s what Warren Buffet means when he states; “A rising tide lifts all boats”. Patience, as your grandmother said, is a virtue, and in more ways than one. Fact IV.
All that said, control what you can control. You can’t control the markets, but you can control how you react to the markets. You can control how much you save / spend. Be disciplined (another of the three behavioral traits), and all the prior data and market forces say the next 30 years will be good to you as an investor.
[i] S&P 500 Index – CNNMoney.com
[ii] Fund Center (Dimensional Fund Advisors, December 31, 2015)
[iii] Blackrock website December 31, 2015
[iv] Orion Benchmarks – Performance Evaluation Report
[v] Fund Center (Dimensional Fund Advisors, December 31, 2015)
[vi] “U.S. High Yield Bonds See Worst Q3 Performance in Four Years” (Gourab Das, Zacks, Seeking Alpha.com, November 19, 2015)
[viii] Matrix Book 2014 (Dimensional Fund Advisors Market Returns)