In 1863, a man named Edward Everett recited one of the most forgettable speeches in American history. Everett’s 2-hour speech was beautiful. It was epic. It was bleeding with patriotism. But after he concluded, a fatigued, almost sad, lanky figure approached the podium that rainy November day and delivered one of the most timeless arrangement of words ever recorded. The following applause was delayed, scattered, and "barely polite.” Nonetheless, Abraham Lincoln’s Gettysburg Address remains among the most admired and cherished speeches of all time.
Everett, not Lincoln, was supposed to be the famous name associated with that day. No one predicted the 16th president’s 272-word speech would be the one to solidify in perpetual fame. Because you really never know how any event will eventually play out. No one does.
And that’s ok.
If we embrace that we do not know everything, we can make decisions based in reality–not delusion. That’s why we, at AssetBuilder, embrace the importance of following an investment approach based on diversification and discipline rather than prediction and timing. Pretending to know the future can only yield short-term benefit–if anything. But we are in this for the long-haul. We continue to pursue investments that last, not mere years, but lifetimes.
At the beginning of the year, a common view was that the financial markets would not repeat their strong returns from 2016. Many cited an uncertain global economy, political turmoil in the US, implementation of Brexit, conflicts in the Middle East, North Korea’s weapons buildup, and the “sky is falling” headlines went on.
But those headlines did not reflect the numbers.
The media said the stark political division in our country brought on by our new president would negatively affect the global markets. But for the first time since 1897, the total return for the US stock market (the CRSP 1-10 Index and, prior to 1926, the Dow Jones Industrial Average) was positive in every single month of the year. During the year, a great deal of media coverage focused on markets at all-time highs; and some investors braced themselves for a sharp drop in stock prices. Not only did the much anticipated “correction” never occur, financial markets remained remarkably calm. Out of 254 trading days in 2017, the total return of the S&P 500 Index rose or fell over 1% only eight times. By comparison, in a more rambunctious year such as 1999, it did so 92 times.
2017 was also riddled with North Korean threats of a nuclear missile strike. They even boasted that mainland US cities were vulnerable to its newest warheads. Next-door neighbor South Korea would seem to have the most to lose if such a catastrophe occurred, but Korean stocks were among the top performers in 2017, with a total return of 29.5% in local currency and 46.0% in US dollar terms.
Financial markets surprised many investors in 2017, but then again, they have a long history of surprising investors. For example, from 1926–2017, the annualized return for the S&P 500 Index was 10.2%. But returns in any single year were seldom close to this figure. They fell in a range between 8% and 12% only six times in the last 92 years but experienced gains or losses greater than 20% 40 times (34 gains, six losses). Investors should appreciate that realized returns may be far different from expected returns.
Overall, 2017 felt like a paradox to investors. The harder they tried to enhance their results by paying close attention to current events, the more likely they failed to capture the rate of return the capital markets offered.
You Can’t Predict Random
…but you can prepare for it. Of course, this is ignored by the ever-over-confident active manager pouring over return rates and hunting for “trends” that advocate their next stock-pick. But what they fail to realize (or at least hope you will) is that, over time, buy and hold and diversification ultimately supersede predicting stocks. Because those predictions might yield great returns this year; but what about the next? And the next? How does one pick winning stocks every year? Here’s a secret: you can’t. As demonstrated below, stocks do not follow a pattern or inclination, hence the Randomness of Returns.
AssetBuilder will never fall down the slippery slope of stock-fortunetelling. Instead, we employ what works. And it’s not that we’re hesitant to adapt to the modern age; we are simply confident we can give you consistent returns throughout your life (including retirement) doing it our way. The randomness of returns model proves that buy and hold is the sturdiest ship in this tumultuous sea of investing.
AssetBuilder Model Performance
Given last year’s positive market performance across multiple asset classes it is tempting to become over exuberant. But we know not to focus on just a single year’s performance–we examine the performance projected over at least a ten-year range. Take a look at the chart below. We picked three DFA funds that are each a component of all of our models from 5 -14. The DFA Emerging Markets Small Cap fund allocation ranges from 3% to 12% within our portfolios. Similarly, both DFA International Small Cap Value fund and DFA US Small Cap Value funds are both part of every portfolio that we manage. The following table illustrates the fund’s performance relative to its benchmark for both one and 10-year time periods.
|1 Year||10 Years|
|DFA Emerging Markets Small Cap||MSCI Emerging Markets Index||35.26||37.28||4.71||1.68|
|DFA International Small Cap Value||MSCI World Ex USA Small Cap Index||27.98||31.04||5.77||5.16|
|DFA US Small Cap Value||Russell 2000 Value Index||7.21||7.84||8.80||8.17|
As you can see, while each fund’s returns in 2017 were impressive, they each trailed their benchmark. However, when you expand to a 10-year time horizon, you see that each fund outperforms their respective benchmark. No matter how the market behaves, it’s important to remind ourselves to maintain the long-term perspective and measure our performance accordingly.
You’ll Be Hearing from Us
In 2017, you made it clear that you’d like to hear from AssetBuilder a little more–and we agree. You should know that we put our client’s interests first. We’re always available to answer questions, review your portfolio or discuss any concerns. We are managing your wealth. So, it’s important that our line is free and clear for you to contact us. Plus, we want to keep you updated.
You can expect new things from us in 2018:
- We’re putting out a new email series titled “Getting Ready for Retirement” where we talk about how to succeed financially retirement.
- Exciting new articles written by DFA alum, Michael French.
- Recurring webinars that tackle common questions about investing, wealth management and dealing with a volatile market.
- We will be posting regularly on Twitter and Facebook about the investment world and wealth-management in general.
- Our Knowledge Center continues to be updated by the incredibly knowledgeable and thought provoking Andrew Hallam.
Abri–Welcome to the Future of Retirement
Last year we launched a limited release of abri—our web-based solution that helps convert accumulated wealth into a predictable monthly income for retirees—and the demand was overwhelming.
Due to the overflow of inquiries, we had to put a few of you on the waitlist. And we still have yet to activate some of you into the program.
For those who participated, we thank you for your thoughts, feedback and time to bare in helping bring abri to market. From a high-level perspective, we heard the following from you:
- Abri takes the guess work out of retirement and helps with the “precision needed for peace of mind.”
- It provides a feeling of comfort with the TIPS ladder.
- You like the idea of prepaying future expenses—inflation protected. “Why take the same risk on your vacation vs. your taxes?”
- It is great having a retirement solution that changes over time and when “life happens.”
One of the biggest challenges with abri was to conceal the immense complexities of the underlying algorithms with a simple, intuitive graphical interface which allows the user to visualize a plan for retirement. Early in our preview program, we realized we had gotten some things right. Like the retirement health index. However, we also needed to make modifications to how abri presented your retirement timeline.
With all of our lessons learned, we are ready to move forward. We expect to have all of the current waitlist activated by the end of April. If you’re interested in getting on the waitlist, please contact your advisor.
A Note from CEO Kennon Grose
As we begin our twelfth year, we remain faithful to our same five core fundamental beliefs:
- Keep fees low –The market is not a constant, but fees are. Since we cannot control the market we have to be good at the things we can control.
- Buy index funds that employ financial science – An index fund is simply a mutual fund that is designed to match or track the components of a market index such as the S&P 500. The advantages of an index fund are obvious: a broad diversification, low turnover ratio and low expense ratios. The average mutual fund operates at an expense ratio of 1.25% according to Morningstar. On a weighted average, our expense ratios range between .24% and .45% depending on the portfolio you choose. We go a step beyond market capitalization indexes by taking advantage of higher returns to small cap and value priced equities – per the Fama/French research.
- Diversification – We are firm believers that we cannot predict the market and for this reason we have built a globally diversified portfolio that puts our clients in a position to take advantage of market-gains across the globe.
- No market timing – One of the most dangerous moves an investor or advisor can make is to react to the market or attempt to predict it. Market timing can be as bold as getting out of the market entirely based on a belief or prediction the market is headed for a recession. Sometimes market timing can simply be selling off a part of an under-performing asset class to purchase a better performing asset class. There are many ways in which one can “market-time” but in the end, the typical outcome is not a positive one for the investor.
- Discipline – In the face of market turmoil, some investors may find themselves making impulsive decisions. Or becoming paralyzed, unable to implement an investment strategy. Not us. We stand by our buy and hold philosophy.
Today, AssetBuilder manages $810 million for approximately 1,200 clients. I would like to thank our clients for continuing to choose AssetBuilder. We had a great year in 2017 and we look forward to another successful year in 2018. It has been a great pleasure getting to meet some of you. Never hesitate to drop us a line. We’d love to hear from you. On behalf of the entire AssetBuilder team, thank you!
- Lauren R. Rublin, “Stocks Could Post Limited Gains in 2017 as Yields Rise,” Barron’s, January 14, 2017.
- Inflation data © 2018 and earlier, Morningstar. All rights reserved. Underlying data provided by Ibbotson Associates via Morningstar Direct.
- As measured by the MSCI All Country World IMI Index (net dividends).
- Adam Shell, “How Will Stocks Make Out in 2017?” USA TODAY, December 24, 2016.
- S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
- As measured by the MSCI Korea IMI Index (net dividends). MSCI data © MSCI 2018, all rights reserved.
- Jonathan R. Laing, “China’s Debt Addiction Could Lead to Financial Crisis,” Barron’s, November 5, 2016.
- As measured by the MSCI China IMI Index (net dividends). MSCI data © MSCI 2018, all rights reserved.
- Neal E. Boudette, “Car Sales End a 7 Year Upswing, With More Challenges Ahead,” New York Times, January 3, 2018.
- Steven Russolillo, “Yellow Flag Waves Over Auto Stocks,” Wall Street Journal, January 4, 2017.
- Ford Motor, General Motors, and Fiat Chrysler returns provided by Bloomberg Finance LP.
- Hedge fund data from Chairman’s Letter, Berkshire Hathaway Inc. 2016 annual report.
- Global diversified allocation is the Dimensional 60/40 Balanced Strategy Index. Indices cannot be invested into directly. See Appendix for index description. Past performance is no guarantee of future investment results