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Third Quarter 2019 Newsletter

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Q3 2019 Newsletter  

If we asked you to hold your breath or stop blinking, how long could you do it? A minute, maybe two?

Now, what if we asked how long you could go without being moved by the latest headline news? Impeachment unrest, Hong Kong protests, Brexit stress, climate change, inverted bond yields, the price of oil … you name it. There’s plenty to think about these days.

We encourage you to consider how current events may shape the actions you’d like to take in your larger life. But topsy-turvy yield curves and all, nothing we’ve seen lately has altered our strategic recommendations on how to pursue your personal investment goals while managing the risks involved.

As a DHG Wealth Advisor client, you may be blinking back tears of boredom by now, for every time we’ve repeated how important it is to stick with your globally diversified investment portfolio.

Still, even though you know you should try to remain calm in the face of breaking news, it’s also worth remembering that doing so is not easy. It is not simply a matter of mind over matter. In fact, your mind is the very organ most likely to trick you into losing your resolve.

You may assume taking deep breaths for survival, versus doing so to maintain your investment stamina, are two entirely different challenges. After all, the first one involves a life-preserving reflex. The second one involves … actually, the exact same thing. Whenever you watch markets digest a never-ending feed of the latest, not-always-greatest news, similar reflexes are happening deep down in your head.

In his excellent book, “The Behavioral Investor,” psychologist Daniel Crosby explains:

“Emotional centers of the brain that helped guide primitive behavior like avoiding attack are now shown by brain scans to be involved in processing information about financial risks. These brain areas are found in mammals the world over and are blunt instruments designed for quick reaction, not precise thinking.”

Case in point. A recent study found, when negative returns were presented in red instead of in a neutral black (e.g., –12.8 instead of –12.8), study participants were significantly more likely to be more pessimistic about what future markets had in store. Two exceptions included participants who were color blind, or from cultures where red is associated with good fortune!

Unless you think color alone should drive your investment decisions, remember that your existing, well-reasoned portfolio remains your best friend for helping your big, biased brain look past the news of the day. To keep your investments intact and on course … just keep breathing. And, as always, let us know how we can help.

Updated ADV Brochure Available

Our ADV Brochure has recently been updated.  As part of our annual review of our ADV Brochure, we made changes to: revise our standard fee schedule for new accounts; provide more information about our financial planning services; provide more information about our retirement plan services, including a retirement plan services standard fee schedule; and clarified the text throughout the document to make it more user friendly.  A copy of the ADV Brochure may be obtained by contacting our Chief Compliance Officer at kevin.broadwater@dhgwa.com or 828 236.5801.   The brochure is also available on our website at dhgwa.com.   You can find more information about us at adviserinfo@sec.gov.

Regards,

DHG Wealth Advisors

 

Market Summary

Looking at broad market indices, US equities outperformed non-US developed and emerging markets during the third quarter. 

Value stocks outperformed growth stocks in the US but underperformed in non-US and emerging markets. Small caps outperformed large caps in non-US markets but underperformed in the US and emerging markets.

REIT indices outperformed equity market indices in both the US and non-US developed markets.

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Investment Insights

A Tale of Two Decades:  Lessons for Long-Term Investors

The first decade of the 21st century, and the second one that’s drawing to a close, have reinforced for investors some timeless market lessons: Returns can vary sharply from one period to another. Holding a broadly diversified portfolio can help smooth out the swings. And focusing on known drivers of higher expected returns can increase the potential for long‑term success. Having a sound strategy built on those principles—and sticking to it through good times and bad—can be a rewarding investment approach.

“THE LOST DECADE”?

Looking at a broad measure of the US stock market, such as the S&P 500, over the past 20 years, you could be forgiven for thinking of Charles Dickens: It was the best of times and the worst of times (see Exhibit 1). For US large cap stocks, the worst came first. The “lost decade” from January 2000 through December 2009 resulted in disappointing returns for many who were invested in the securities in the S&P 500. An index that had averaged more than 10% annualized returns before 2000 instead delivered less‑than‑average returns from the start of the decade to the end. Annualized returns for the S&P 500 during that market period were −0.95%.


Exhibit 1. S&P 500 (Total Return)
January 2000-June 2019, monthly levels

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Performance data represents past performance and does not predict future performance. Indices not available for direct investment. Performance does not reflect the expenses associated with the management of an actual portfolio. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global.


Exhibit 2. The 2000s
Annualized returns (%): January 2000-December 2009

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In US dollars. Performance data represents past performance and does not predict future performance. Indices not available for direct investment. Performance does not reflect the expenses associated with the management of an actual portfolio. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. See Index Descriptions in the appendix for descriptions of the Dimensional index data.


Yet it was a good decade for investors who diversified their holdings globally beyond US large cap stocks and included other parts of the market with higher expected returns—companies with small market capitalizations or low relative price (value stocks). As Exhibit 2 shows, a range of indices across many other parts of the global market outperformed the S&P 500 during that time span.

FLIPPING THE SCRIPT

The next period of nine‑plus years reveals quite a different story. It has looked more like best of times for the S&P 500, as the index, when viewed by total return, has more than tripled since the start of the decade in the bounce‑back from the global financial crisis. US large cap growth stocks have been some of the brightest stars during this span. Accordingly, from 2010 through the first half of 2019, many parts of the market that performed well during the previous decade haven’t been able to outperform the S&P 500, as Exhibit 3 displays. Since many of these asset classes haven’t kept pace with the S&P, these returns might cause some to question their allocation to the asset classes that drove positive returns during the 2000s.


Exhibit 3. The 2010s
Annualized returns (%): January 2010-June 2019

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In US dollars. Performance data represents past performance and does not predict future performance. Indices not available for direct investment. Performance does not reflect the expenses associated with the management of an actual portfolio. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. See Index Descriptions in the appendix for descriptions of the Dimensional index data.


THE CASE FOR GREAT EXPECTATIONS

It’s been stated many times that investors may want to take a long‑term perspective toward investing, and the performance of stock markets since 2000 supports this point of view. Over the past 19½ years (see Exhibit 4), investing outside the US presented investors with opportunities to capture annualized returns that surpassed the S&P 500’s 5.65%, despite periods of underperformance, including the most recent nine‑plus years. Cumulative performance from 2000 through June 2019 also reflects the benefits of having a diversified portfolio that targets areas of the market with higher expected returns, such as small and value stocks. And it underscores the principle that longer time frames increase the likelihood of having a good investment experience.


Exhibit 4. The 2000-2019
Annualized returns (%): January 2000-June 2019

3q19chart4

In US dollars. Performance data represents past performance and does not predict future performance. Indices not available for direct investment. Performance does not reflect the expenses associated with the management of an actual portfolio. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. See Index Descriptions in the appendix for descriptions of the Dimensional index data.


No one knows what the next 10 months will bring, much less the next 10 years. But maintaining patience and discipline, through the bad times and the good, puts investors in position to increase the likelihood of long‑term success.

 




APPENDIX: Index Descriptions

Dimensional US Large Cap Value Index is compiled by Dimensional from CRSP and Compustat data. Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market with market capitalizations above the 1,000th-largest company whose relative price is in the bottom 30% of the Dimensional US Large Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price. The index emphasizes securities with higher profitability, lower relative price, and lower market capitalization. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: non-US companies, REITs, UITs, and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to March 2007. The calculation methodology for the Dimensional US Large Cap Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1975: Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market with market capitalizations above the 1,000th-largest company whose relative price is in the bottom 20% of the Dimensional US Large Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price.

Dimensional US Small Cap Index is compiled by Dimensional from CRSP and Compustat data. Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market whose market capitalization falls in the lowest 8% of the total market capitalization of the eligible market. The index emphasizes companies with higher profitability. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: non-US companies, REITs, UITs, and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to March 2007. The calculation methodology for the Dimensional US Small Cap Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1975: Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market whose market capitalization falls in the lowest 8% of the total market capitalization of the eligible market.

Dimensional International Marketwide Value Index is compiled by Dimensional from Bloomberg securities data. The index consists of companies whose relative price is in the bottom 33% of their country’s companies after the exclusion of utilities and companies with either negative or missing relative price data. The index emphasizes companies with smaller capitalization, lower relative price, and higher profitability. The index also excludes those companies with the lowest profitability and highest relative price within their country’s value universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the Dimensional International Marketwide Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index.

Dimensional International Small Cap Value Index is defined as companies whose relative price is in the bottom 35% of their country’s respective constituents in the Dimensional International Small Cap Index after the exclusion of utilities and companies with either negative or missing relative price data. The index also excludes those companies with the lowest profitability within their country’s small value universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the Dimensional International Small Cap Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1990: Created by Dimensional, the index includes securities of MSCI EAFE countries in the top 30% of book-to-market by market capitalization conditional on the securities being in the bottom 10% of market capitalization, excluding the bottom 1%. All securities are market capitalization weighted. Each country is capped at 50%; rebalanced semiannually.

Dimensional Emerging Markets Index is compiled by Dimensional from Bloomberg securities data. Market capitalization-weighted index of all securities in the eligible markets. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. Exclusions: REITs and investment companies.


The content in this newsletter is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. The information in this newsletter is believed to be accurate as of the time it is distributed and may become inaccurate or outdated with the passage of time. You should contact your financial advisor or CPA professional before making any tax or investment-related decision.  Past performance does not guarantee future results.  All investments may lose money.

Attachments

  1. 3Q19InvestmentNewsletter.pdf 10/24/2019 12:31:27 PM