1st Quarter 2017 Market & Model Portfolio Report

The first quarter of 2017 was a good one for the market generally. The best performing asset classes were emerging markets at 11.4%, international at 7.9% and large USA (S&P500) at 6.1%. While small caps were in favor in emerging markets and international, they were not in favor in the USA – specifically small and value (Russell Value index -0.1%). The opposite, large/growth, usually a laggard, was best index in U.S. stocks at 8.9%. This swing is not unexpected after the small/value significant run-up in Q4 2016. Global real estate was up at 3.4% and US real estate was fractionally down -0.3% The O’Reilly Wealth Advisors 100% equity model was up 5.2% with the most conservative portfolio, 40% equity, came in at 2.6%, and the others lay in-between. The main value of looking at a quarter is to satisfy your curiosity, “What happened in the last three months?” Remember that a quarter is a “second” in market time and if you look at any quarter, you are bound to see “odd” market behaviors. In fact having the quarter results mirror long term expectations would be unusual! Investing is a long term proposition and there is a huge amount of statistical noise in stock market data. That’s why we focus in the on 18+ years of results, not 1, 3, 5 and 1o years. The 18 year data has a higher probability of representing the actual expectations of future performance.   See our market summary (16 pages) here and the model portfolio results (2 pages) here....

My “Inner Nerd” Loves When Data Shatters Preconceived Notions

Wouldn’t you think that when markets are hitting new highs – that the chances of the market being up in 12 months is lower than at other times? Makes sense – gotta come down sometime? Well it turns out the market is up more than we realize. We tend to focus on the negativity we hear loudly when the market is down and it creates an incorrect perception. The data shatters that preconceived notion. Dimensional Fund Advisors studied this by looking at the S&P500 from 1926 through 2016, see the paper here. Each time a month finished at a new S&P500 high – they looked at the S&P500 12 months later and found that 80.5% of the time, the S&P500 was higher not lower! When they looked at ALL the months across those 91 years – 74.7% of the time, 12 month later, the S&P500 was higher. Very close numbers, very slightly favoring higher markets when starting at a new high!  Wow! I’ve presented data here previously that shows the market is up about 3 out of every 4 years across long time periods. So I guess I should not be surprised! I love it when proof – actual undeniable DATA smashes preconceived notions! I hope you do too!...

2016 Market Review (incl Q4) and Quarterly Model Portfolio Performance

It was a very good year. The small cap premium and value premium were potent in USA with Russell 2000 Value index up 31.7% vs Russell 2000 at 21.3%. In large cap the Russell 1000 Value Index was up 17.3% vs. Russell 1000 at 12.7%. S&P500 11.96%. Our models take advantage of these persistent and pervasive market behaviors by including them at slightly higher than  market cap weighting. MSCI Emerging Markets index up 14.9%. US REIT 6.7%. The rest of the world lagged with MSCI World exUSA Index +2.8%. Our most aggressive model, a mix of the above, assuming 1% advisory fee, +12.7% for 2016. Here’s a link to the Market Review (30 pages) and our Model Summary (2 pages)....

Small Stocks Surge at end of 2016 – DFA Article

Diversification is a topic I write about constantly as it is one of the keys to long term investment success. Closely related is discipline. The discipline to stick with smart investing techniques like diversification despite constant temptation to deviate from it. The stock markets are continuously “surprising” us.  Small stocks are of particular interest – and given the persistent (over time) and pervasive (around the world) out-performance of Small Cap stocks over Large Cap stocks – we slightly overweight Small Cap stock in out clients’ portfolios. The enclosed article by Dimensional Fund Advisors titled “A Vote for Small Cap Stocks?” covers the “surprise” of small cap stocks great perofrmance in November 2016. DFA used the Russell 1000 (large) and Russell 2000 (small) to make the comparison. 2016 Through October: Large: 5.82%  Small: 6.16% 2016 Through November: Large: 9.99%  Small: 18.00% The positive difference of small cap stocks outperforming large cap stocks in CY 2016 went from less than 1% to a little more than 8% in just one month. Points: 1) Always be diversified and 2) The benefits of Small Cap outperforming Large Cap can come and go very quickly. I want to point out that this is not a political statement! Just an observation. And you can bet on more surprises – up and down – no matter who is in office – which is exactly the point here. As much as political partisans on all sides would like to claim that their candidate and ideals are best for stock market movement – it’s very difficult to prove. And often there are trade-offs – for example though small caps did well recently coinciding with the election –...

Prediction Season

Please see the PDF found here and also read the introduction and conclusion below. Click the back arrow to return after opening the PDF. Prediction Season – December 2016 Introduction: The close of each calendar year brings with it the holidays as well as a chance to look forward to the year ahead. In the coming weeks, investors are likely to be bombarded with predictions about what the future, and specifically the next year, may hold for their portfolios. These outlooks are typically accompanied by recommended investment strategies and actions that are aimed at trying to avoid the next crisis or missing out on the next “great” opportunity. When faced with recommendations of this sort, it would be wise to remember that investors are better served by sticking with a long-term plan rather than changing course in reaction to predictions and short-term calls. <see PDF for the full article> Click the back arrow to return after opening the PDF. Conclusion: As the end of the year approaches, it is natural to reflect on what has gone well this year and what one may want to improve upon next year. Within the context of an investment plan, it is important to remember that investors are likely better served by trusting the plan they have put in place and focusing on what they can control, such as diversifying broadly, minimizing taxes, and reducing costs and turnover. Those who make changes to a long-term investment strategy based on short-term noise and predictions may be disappointed by the outcome. In the end, the only certain prediction about markets is that the future will remain full...

Wow – New Market Highs & Unpeeling the 401k Onion

As of December 9, 2016, “the markets” have been doing quite well. Keep in mind there’s a million ways to define the market. Our definition of “the market” is performing even better than the average person’s definition. It appears the “premiums” we employ for our clients – small stocks beat large and value stocks beat growth stocks are in favor, so our clients are enjoying higher performance in their portfolios. Upward moving markets happen! It may seem like a surprise, but since we cannot predict market movements – it’s actually not a surprise. We have no idea where the market will go or when it will go there. A year from now, it could be higher, lower or the same. (Choose one and you have a 33% chance of being correct, just like the celebrated Wall Street Forecasting “Experts”!) Our human behavior and biases make it difficult for the average person to be a great investor. After a notable market movement (or non-movement) has happened, as time passes, we begin to think we saw it coming. It’s obviously not true, but our minds play tricks on us. Also when we are in the midst of a market situation – we suffer “recency bias” – meaning that we over-focus on the present without seeing the bigger picture. Right now a lot of people are piling onto the market when we are at record highs. That’s not a problem as long as your commitment is 5 years or longer. We can help you “keep your cool” and make more money than most, by staying invested and highly diversified. The media and...