2018: Keep on Keepin’ on
February 20, 2019

2018: Keep on Keepin’ on

Bob Dylan

In 1975 Bob Dylan released the acclaimed “Tangled Up in Blue” —with temperate lyrics hailed by music critics and literary scholars alike. Dylan, known for his poetic style and profound use of imagery, lassoed the American imagination for decades with a song he wrote, and rewrote, as time went on. However, one little phrase stayed in all versions:

The only thing I knew how to do
Was to keep on keepin' on
Like a bird that flew
Tangled up in blue

“Keep on keepin’ on” —a self-explanatory colloquialism reminding us through the generations to drudge on despite adversity and setbacks. It is a sentiment many investors forget, and it is they who aptly end up tangled up in blue.

The Return of Volatility

Stocks Haven’t Seen This Much Volatility Since the Financial Crisis.” This was a headline from a CNBC article in April 2018, reflecting the panicky tone of some investors after a relatively stable 2017 year. But other news stories punctuating early 2018 included reports on global economic growth, corporate earnings, record low unemployment in the US, the implementation of Brexit, US trade wars with China and other countries, and a flattening US Treasury yield curve. Global equity markets delivered positive returns through September, followed by a decline in the fourth quarter, resulting in a −4.4% return for the S&P 500 and −9.4% for the MSCI All Country World Index for the year.

But the fourth quarter equity market declines of 10% were not uncommon. The S&P 500 returned −13.5% in the fourth quarter while the MSCI All Country World Index returned −12.8%. It is important to note that after declines of 10% or more, equity returns over the subsequent 12 months have been positive 71% of the time in US markets and 72% of the time in other developed markets.

World Stock Market Performance Graph

The increased market volatility in the fourth quarter of 2018 underscores the importance of following an investment approach based on diversification and discipline rather than prediction and timing. There is little evidence suggesting that investors can forecast future events more accurately than all other market participants and then predict how other market participants will react to their forecasted events on a consistent basis. Investors should take comfort that market prices quickly incorporate relevant information and that the information will be reflected in expected returns.


As US stocks have outperformed international and emerging markets stocks over the last several years, some investors might be reconsidering the benefits of investing outside the US. For the five-year period ending October 31, 2018, the S&P 500 Index had an annualized return of 11.34% while the MSCI World ex USA Index returned 1.86%, and the MSCI Emerging Markets Index returned 0.78%.

While international and emerging markets stocks may have delivered disappointing returns relative to the US over the last few years, it is important to remember that recent performance is not a reliable indicator of future returns.

As shown below, nearly half of the investment opportunities in global equity markets lie outside the US. Non-US stocks, including developed and emerging markets, account for 48% of world market capitalization and represent thousands of companies in countries all over the world. A portfolio investing solely within the US would not be exposed to the performance of those markets.

World Market Capitalization

World Stock Market Performance Graph

It is easy to see the potential opportunity cost associated with failing to diversify globally by reflecting on the period in global markets from 2000–2009. During this period, often called the “lost decade” by US investors, the S&P 500 Index recorded its worst ever 10-year performance with a total cumulative return of –9.1%. However, looking beyond US large cap equities, conditions were more favorable for global equity investors as most equity asset classes outside the US generated positive returns over the course of the decade. Expanding beyond this period and looking at performance for each of the 11 decades starting in 1900 and ending in 2010, the US market outperformed the world market in five decades and underperformed in the other six. This further reinforces why an investor pursuing the equity premium should consider a global allocation. By holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

Average Compound Returns for Stocks in a Following 12-Month Period

Market Decline Cutoff US Large Caps Non-US Developed Markets Large Caps Emerging Markets Large Caps
10% 11.25% 11.18% 13.51%
20% 11.61% 14.44% 21.52%
30% 14.31% 19.07% 30.05%

Emerging Markets

Emerging markets have traditionally grown at a faster rate than developed markets. In the same way that Coke can only get so much larger, the US economy can also only expand so much before reaching capacity. In contrast, emerging countries can double their economic output with relatively little cost. For instance, imagine the effort US businesses put in to “increase productivity.” This costs a significant amount of money. Contrast this with a blanket manufacturer in Bangladesh who may install a light bulb so that he can work for two additional hours every day (into the evening). This may result in a 20% increase in productivity and cost very little. So basically, these economies can make significant gains for little capital investment. Following this Bangladeshi blanket around the world is also informative. Historically, the blanket was quite likely purchased by someone in a developed market. Imagine that the blanket travels around the world to Target where you see it and decide to buy it. The boost to the overall US economy would be pretty small (for all blankets made in Bangladesh). However, imagine that blankets account for 10% of the GDP (total products produced) of the emerging market. US consumers love the blanket and Bangladesh produces 2X the number that they previously produced. Their GDP increases by 10%. Americans consume every single blanket, (our consumption is also part of GDP because Target has “produced” this blanket). Even so, this represents less than a 1% increase in our GDP. Clearly, the emerging markets benefit more than the US economy.

Historically, US consumers have been among the largest consumers in the world. However, this is beginning to change. The two graphs below both illustrate the same point. By 2025 both India and China will have larger middle-class consumption than the US.

China and India are Projected to be Drivers of Growing Middle Class
Global Middle Class Consumption

Global Middle Class Consumption

However, the percent of revenue that EM markets get from the US is no longer as large as it has historically been. For instance, China accounts for 25% of all such revenue, the US is a distant third at 9.1%. So, many of those blankets are no longer being sold in Boston but now they’re being sold in Beijing. Which means that as the Chinese and Indian consumer class continues to grow, this imbalance will continue to favor emerging markets regardless of US consumption.

EM Companies’ Revenue Shares by Select Country
% of Total Revenues

EM Companies’ Revenue Shares by Select Country

Interest Rates

Remember that no one can predict with certainty that “rates will rise.” Indeed, for much of the last 5 years, most economists believed that rates would rise faster than they actually did. We, instead, implement fixed income strategies that will weather rising interest rates and still provide a “cushioning effect” during volatile times. This is primarily accomplished inside of the portfolio when the manager “shortens the duration.” Essentially, this means that the manager may be purchasing securities that they will not hold as long. This allows cash to be more readily available to take advantage when interest rates rise.

Our abri customers saw the effect of our “duration matching” strategy which allowed them to maintain their retirement funding levels throughout the volatility of 2018. Instead of trying to time interest rate moves for these clients, we match known future expenses to treasury-inflation protected securities. This provides the necessary cash flow to meet those future expenses.

If you’re nearing retirement or know someone who is, feel free to contact one of our advisors or explore our website to see how it works.

Keepin’ Our Promises

Last year, we promised to increase our communication and provide education to help answer your questions and keep you in the know. In 2018 we conducted 10 webinars for which over 400 of you registered. We loved hearing from you and answering questions about everything from ROTH 401k rollovers to in-depth portfolio construction. We look forward to continuing these webinars in 2019 as an effort to keep you an informed, knowledgeable investor. Plus, they are a lot of fun!

We also released over 50 articles in our Knowledge Center tackling index investing, navigating volatility, retirement and much more. We intend these articles to enhance your understanding of today’s market and improve your savvy. The brain behind these is that of the world famous Andrew Hallam, author of the Millionaire Teacher and Millionaire Expat, who helps investors of all levels across the globe.

We also launched our retirement service, abri, that gives retirees consistent income for the duration of retirement. Many of you on the waitlist were, at last, activated and we thank you for your patience.

Going forward in 2019, we will continue to execute webinars, video shorts, and articles. In addition, we will be sending out a quarterly commentary from our CIO, Michael French, or your advisor. These quarterlies will provide our observation on how certain market trends affect your investment. We will also be sending out our “Core 4” philosophy, which are the investment principals that have guided us for the last decade; this is information we feel you should know as an investor.

We would also like to thank you for your feedback. It is through your suggestions and questions that we are able to improve as a company and provide a better, more satisfactory investment experience.

A Note from Chief Investment Officer, Michael French

It has been a pleasure to meet many of you over the past couple of years whether those meetings have been in person, over the phone, or email. Your insights and questions play a large role in shaping our direction as a firm. We take great interest in understanding your passions and conversely what brings you the greatest anxiety. My role is to work with our advisors on your behalf every day to ensure that you are obtaining the best investment experience that we can offer. I also regularly meet with our partners at DFA to review portfolio objectives and look at outside funds to determine how they may be appropriate for our clients. Additionally, I am always available to discuss “held away” assets (investments outside the firm) and the impact that they may have on your overall portfolio. In order to do the best job possible, I would love to hear from you. If you have any questions please feel free to reach out to me directly, or through your advisor. I look forward to getting to know you better.

A Note from Chief Executive Officer, Kennon Grose

I would like to first announce our new Chief Operating Officer, Bruce Griffith and Chief Investment Officer, Michael French. This change in our organization is based on our desire to better serve our clients and create a better experience as you interact with AssetBuilder.

I would also like to personally thank everyone for sticking with AssetBuilder through the long-haul. Even as markets became volatile and active managers made their quick buck, our clients kept their poise and keen outlook on investing and held steady. Our philosophy is not only tried and true but also trusted by the great investors of our time. From all of us at AssetBuilder, thank you for your continued trust and thank you for your business.


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This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.