Investment Review

Winter 2019

Following a bad year in the markets, it is easy to overstate the risks. And following a good year, it’s easy to feel good about the markets and ignore the risks. This inverted perception of risk and reward is what underlies the bulk of the decision errors made by investors. We view our job as ignoring the psychological impact of recent market performance and focusing on long-term expectations for any given level of risk.

Last year (2018), the major stock market indices posted negative returns. Read on for details.

 
Selected Headlines from the Past 12 Months Graphed with the World Stock Market Performance (MSCI All Country World Index)

 
The chart above highlights some of the year’s prominent headlines in the context of global stock market performance as measured by the MSCI All Country World Index-Investable Market Index (MSCI ACWI IMI). We are not offering these headlines to explain market returns. But they do serve as a reminder that investors should view daily events from a long-term perspective and avoid making financial decisions based solely on the news.

 
Investment Review

Benchmark Funds	Q4 2018	12 Months Ending 12/31/2018
U.S. Large Cap Vanguard 500 Index Fund	-13.6%	-4.5%
U.S. Large Cap Value iShares Russell 1000 Value Index	-11.7%	-8.4%
U.S. Small Cap iShares Russell 2000 Index	-20.3%	-11.1%
U.S. Small Cap Value iShares Russell 2000 Value Index	-18.7%	-13.0%
International Vanguard Total International Stock Index Fund	-11.7%	-14.4%
Emerging Markets Vanguard FTSE Emerging Markets ETF	-6.4%	-14.8%
U.S. REITs Vanguard REIT ETF	-6.5%	-6.0%
Investment-Grade Bonds iShares Core Total U.S. Bond Market ETF	+1.9%	+0.1%

Source: SchwabInstitutional.com

 
Individual Asset Classes

The returns for the recent quarter that are listed below are sourced from my.Dimensional.com.

World Asset Classes

Equity markets around the world posted negative returns for the quarter. Looking at broad market indices, emerging markets outperformed developed markets, including the U.S. Value stocks were positive versus growth stocks in all markets, including the U.S. Small caps underperformed large caps in the U.S. and non-U.S. developed markets but outperformed in emerging markets. REIT indices outperformed equity market indices in both the U.S. and non-U.S. developed markets.

U.S. Stocks

U.S. equities underperformed both non-U.S. developed and emerging markets. Value outperformed growth in the U.S. across both large and small cap stocks. Small caps underperformed large caps in the U.S.

International Developed Market Stocks

In U.S. dollar terms, developed markets outside the U.S. outperformed the U.S. equity market but underperformed emerging markets during the quarter. Value outperformed growth across large and small cap stocks. Small caps underperformed large caps in non-U.S. developed markets.

Emerging Markets Stocks

In U.S. dollar terms, emerging markets outperformed developed markets, including the U.S. Value outperformed growth across large and small cap stocks. Small caps outperformed large caps.

Real Estate Investment Trusts

Non-U.S. real estate investment trusts outperformed U.S. REITs in U.S. dollar terms.

Fixed Income

Interest rate changes across the U.S. fixed income market were mixed during the fourth quarter of 2018. The yield on the 5-year Treasury note declined 43 basis points (bps), ending the quarter at 2.51%. The yield on the 10-year Treasury note decreased 36 bps to 2.69%. The 30-year Treasury bond yield decreased 17 bps to finish at 3.02%. For 2018, yields on the 10-year Treasury and 30-year Treasury increased 29 bps and 28 bps, respectively.

In terms of total returns, short-term corporate bonds increased 0.78% during the quarter. Intermediate-term corporate bonds had a total return of 0.58%.

Total returns for short-term municipal bonds were 1.10% for the quarter. Intermediate-term municipal bonds returned 2.00%.

Conclusion

Sitting through a year of negative returns may not be easy. Read Why Should I Diversify My Portfolio? in this newsletter about why diversification is important. You must be sure that you can live with the risk assumptions underlying your portfolio – but also recognize the risks of getting overly defensive (translated into lower long-term returns). Please let us know if you’d like to discuss your portfolio or financial plan.

Thank you for your continued confidence and trust.