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Fourth Quarter 2020 Newsletter

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Fourth Quarter 2020 Newsletter

By: Sarah K. Charles, CSRIC™, AIF® / Director and Bill Laird, CFA®, CFP® / Co-Chief Investment Officer

The Most Important Measures - Sarah K. Charles

By all counts, 1896 was a significant year. Utah was admitted as the 45th U.S. state. The first X-ray photograph was taken. Puccini's La Bohème premiered in Turin while Oscar Wilde's Salomé premiered in Paris. Stanford and California played the first known women's college basketball game. Henry Ford finalized development of his first automobile – the Ford Quadricycle. And in May of that year, 12 stocks were chosen to form the Dow Jones Industrial Average (DJIA).

When Charles Dow created his namesake index 125 years ago, stocks were not a popular form of investment - largely because access to accurate and balanced information about company financials was limited. This made the stock market hard to understand, and most of the time investors had no sense of whether the market was up or down. According to Investopedia:

Like any observer, Dow saw that many or most stocks tended to move like a wave in the same direction from day to day as investors reacted to events and expectations. He sought to put a number on that daily movement. Dow chose 12 of the biggest and most influential corporations of the day. Each was a giant in its sector, and most reflected demand for the raw materials that fed the American economy, like coal, sugar, and oil. At the close of every trading day, he added up all of their stock prices and divided by 12. That was the Dow Jones Industrial Average.1

At inception, the DJIA was both a gauge for the health of the overall economy (which at that time was driven largely by industrials), and a tool to help investors make sense of the stock market overall. Over a century later, it remains a key measure of the stock market and a common benchmark when it comes to reporting on U.S. market activity. Ask the question “what did the market do today?” and it is highly likely that the answer will be about the Dow. 

But while the DJIA served as an accurate proxy for the overall stock market in 1896, things look a little different today, raising the question: is a centenarian index founded in the same year as the original automobile and the X-ray machine still a relevant market benchmark in an era of electronic vehicles and robotic digital radiography?

Source: thehenryford.org                                              Source: caranddriver.com

To be fair, the DJIA has evolved since its inception over a century ago. Over the years, it has expanded from 12 names to 30, and today it represents a mix of sectors including not just industrials but information technology, consumer staples, healthcare, financials, energy, materials, communication services and consumer discretionary – a reflection on how much our overall economy has changed since the 19th century. It has also seen tremendous growth in value, increasing from 40.94 to 30,606.482.

But when you look at the total U.S. market, as illustrated in Exhibit 1, you can see that the Dow is very shallow measure.


Measuring "The Market"
Data as of December 31, 2020

1 Source: indexarb.com and Dow S&P Data 2 Source: Morningstar 3 Source: Dow S&P Data 4 S&P Total Market Index used as "Total US Market" | Source: Dow S&P Data

In addition to holding less than 1% of all publicly traded U.S. companies and being worth about a quarter of their total value, the DJIA is a price-weighted index. In a price-weighted index, stocks are ranked solely by share price which means that the higher priced stocks will have more of an influence over the index than lower priced stocks. Most indexes (including the S&P 500) are capitalization-weighted. In a capitalization-weighted index, a company’s overall size (or market capitalization, which is the share price x the number of outstanding shares) is what matters. So, the bigger the company, the bigger the influence. Think about a pizza: what matters more – the size of the pie or the size of the slice? A price-weighted index like the DJIA cares more about the size of the slice than the size of the pie.

While there’s an interesting discussion to be had around the pros and cons of price-weighted versus  capitalization-weighted indexes, the point I want to illustrate is that how an index is designed and measured has an impact on its performance – and if the purpose of the index is to serve as a benchmark, then that matters.

The DJIA is far from being the only imprecise measure of “the market.” Both the S&P 500 and the NASDAQ are also frequently cited as standard benchmarks for “the market,” and as illustrated above in Exhibit 1, you can see that neither index is an accurate representation. While the NASDAQ consists of a much bigger basket of names than either the DJIA or the S&P 500, it does include international companies, which therefore makes it a poor “apples to apples” comparison of the U.S. market. And while the S&P 500 certainly captures a large portion of the total value of the U.S. market, it is limited to 500 large cap companies – which means there are ~ 2500 companies, mostly small cap, not accounted for. By the way – we know from academic research that small companies have a higher expected return than large companies over time. With that fact in mind, shouldn’t they be included in any measure of “the market?”

The DJIA, S&P 500, and NASDAQ are all referenced daily by the mainstream media when talking about “market” performance, and yet, if further proof is needed that they are inconsistent and arbitrary benchmarks, look no further than their performance in 2020 which was wildly divergent:

S&P 500 + 16.42%
DJIA + 7.31%
NASDAQ + 43.64%

Furthermore, we tend to focus on the U.S. because we live in the U.S., but clients of DHGWA know that we believe in the importance of building globally diversified portfolios, and so it’s important to expand our scope and consider the total global market as shown in Exhibit 2.


Measuring "The Market"
Data as of December 31, 2020

1 Source: indexarb.com and Dow S&P Data 2 Source: Morningstar 3 Source: Dow S&P Data 4 S&P Total Market Index used as "Total US Market" | Source: Dow S&P Data 5 S&P Global BMI Index used as "Total Global Market" | Source: Dow S&P Data

If the primary indexes that we tend to think of as “the market” fall short of being accurate proxies for the U.S. market, the inaccuracies become even larger when comparing them to the total global market. However, with ~ 13,700 stock holdings in over 45 countries, the average DHGWA client portfolio looks a lot like the total global market. Given our investment philosophy, it is easy to see how comparing our globally diversified portfolios to a limited subset like the 30 stocks of the DJIA or even the 500 of the S&P 500 simply does not make sense.

Benchmarks serve as an important criterion against which things may be compared or measured, so if you
are looking for a benchmark that is a better reflection of the broader investable universe, here are two options:

  1. The Russell 3000 tracks 3000 U.S. companies which represent 98% of total U.S. market capitalization. It is still missing a handful of the smallest names, but it is a pretty good proxy for the U.S. market.
  2. If you are looking for a benchmark for a globally diversified portfolio, consider the MSCI All Country World Index (ACWI). This global equity index captures performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 27 emerging markets. And while the MSCI ACWI only includes ~ 3,000 names, they represent ~ 85% of the market capitalization in each market in the index.

Even though both benchmarks are much broader in scope, they still aren’t perfect “apples to apples” comparisons because they are all-stock indexes, and many clients are invested in balanced portfolios – i.e., they have a mix of both stocks and bonds. While bonds help reduce portfolio risk, they also have a lower expected rate of return which means investors may potentially feel frustrated if they compare the performance of a balanced portfolio to an allstock benchmark. 

But what if there was a better way to measure success? What if, instead of measuring the performance of your portfolio against an index benchmark, you asked yourself:

  • Am I on track to achieve my goals?
  • Am I using my resources to live the life I want?
  • Do I have financial clarity and peace of mind when it comes to my personal financial situation?

In our opinion, the success of your personal plan is what matters most, which means progress towards your goals and peace of mind are much more meaningful metrics to track than portfolio performance, and your DHGWA Strategic Life Plan is the best benchmark out there. 

So, the next time you find yourself checking what “the market” did, remind yourself that your globally diversified portfolio is a lot bigger than “the market” that is usually reported in the mainstream media. Remind yourself that achieving your goals while taking on less risk is success. And more importantly, remind yourself that progress and peace of mind are the most important measures.


2as of 12/31/20

Q420 Market Perspective - Bill Laird

The fourth quarter was significant in its news flow, with two items taking center stage: development of an
FDA-approved COVID-19 vaccine and Election Day in the United States. Those near-term events
combined with worldwide central bank commitment to support the economy provided a strong backdrop for advancing prices of stocks. The rally was similar in strength to that experienced in the second quarter of this year but was broader in scope. An expansion of the rally benefited broadly diversified investors, like our clients.

During the fourth quarter, small cap U.S. stocks took the lead domestically, the trend of growth over value reversed, and overseas stocks outperformed U.S. stocks. In the bond market, higher risk sectors such as high yield and corporate bonds outperformed lower risk sectors such as government issued securities.

Global market returns for 2020 are outlined in Exhibit 3.


The market advances summarized above have brought a majority of markets back to all-time highs after a steep drawdown in the first quarter of 2020. While we are pleased that markets have erased losses in a very rapid fashion, we realize this may cause indecision for our clients building wealth who have assets they could deploy into their long-term retirement plan.

The assets you dedicate to higher risk assets (including stocks) should be aligned with spending expected to occur years from now – not months – which means the old adage is true: time is on your side. Unfortunately, resisting the temptation to wait for the market to drop before investing your cash is a difficult one. And as we have all experienced, the anticipated drop may fail to occur together, is not very steep, and/or may not provide you enough time to deploy your capital.

In thinking conceptually about all-time highs, they should reflect bullish (positive) sentiment. It means that demand for a given asset is greater than supply, pushing the price of that asset upwards. Positive price movement can then attract more buyers, driving continued demand and continuing the trend. Exhibit 4 illustrates this trend.


Additionally, the number of trading days in between highs is shorter than you would think, as outlined in Exhibit 5.


While it may be difficult to keep your eyes off the lengthy periods between highs in the late 1970’s, late 1990’s, and the late 2000’s, the S&P 500 has resided within 5% of an all-time high nearly half of the time since 1950. Most rebounds to all-time highs occur during a relatively short period, especially compared to most investors’ timelines. 

Lastly, what do the absolute returns look like for investors brave enough to invest at all-time highs? They actually look better for S&P 500 investors, at least over the last 30+ years, likely due to the supply-demand dynamic outlined in Exhibit 6. And yes, observations for investing at all-time highs are similar in overseas markets.



Source: FactSet, J.P. Morgan Private Bank. Data is as of August 27, 2020.

The other big news from Q420 is that you may have noticed some new funds in your portfolio. As you know DHGWA’s investment philosophy is guided by Modern Portfolio Theory and while our approach to building portfolios has not changed, our Investment Policy Committee is constantly reviewing how to best implement our strategy. After several months of careful review, we are in the process of implementing changes designed to result in greater portfolio diversification at a lower cost. We have added several stock funds that more closely track broad market indices. We complement those market focused strategies with high conviction strategies designed to add exposure to portions of the market that have characteristics (value stocks, small/mid cap stocks) that have a higher expected return over time. On the bond side, we have increased exposure to corporate bonds which offer better potential opportunities for total return versus government related securities.

* * * * *

The ball may have dropped at midnight on December 31st, ushering in a new year, but the uncertainties we faced in 2020 remain. From the rising number of COVID cases to the potential for widespread adoption of the vaccine to the scope and speed of economic recovery to the legislative agenda of the incoming Biden administration – investors have a lot of questions. But if 2020 taught us anything, it is that headlines rarely serve as an accurate crystal ball for what will happen in global markets. Only time will tell how things will play out and trying to predict what might happen this year is futile (although there are plenty of magazine covers suggesting otherwise). As always, we prefer to stay focused on our mission of delivering financial clarity and peace of mind, and helping you tune out the noise to ensure that you have an outstanding investment experience.

The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned above may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed accurate as of the time it is presented, and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.


  1. 4Q2020Newsletter.pdf 1/14/2021 2:28:38 PM