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Understanding Recent Market Volatility

by Sergio Mariaca on Feb 9, 2018 3:10:42 PM |Share:

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The markets started 2018 with the wind in their sails, and investors watched as indexes continued their nearly straight-up trajectory from 2017.

Then, after the S&P 500’s best January performance since 1997, stocks took a dive at the beginning of February. 1 On Monday, February 5, the Dow and S&P 500 each lost more than 4%, and the NASDAQ’s drop was nearly as significant.2 The next day, all 3 indexes posted positive returns.3

We understand how unnerving these fluctuations can feel—especially as headlines shout fear-inducing statistics. Our goal is to help you better understand where the markets stand today and how to apply this knowledge to your own financial life.  

 

Putting Performance Into Perspective

When markets post dramatic losses or whipsaw back and forth, many people wonder what causes the turbulence—and may assume negative financial data is to blame. However, the recent selloff and volatility don’t have the culprits you might expect.  

No negative economic update or geopolitical drama emerged to spur the selloff February 5–6. Instead, emotion-driven investing may have combined with computer-generated trading to fuel the decline. In particular, after the latest labor report showed wage growth picking up more than expected, some investors began to worry about increasing inflation.4 Higher wages can mean companies have to raise their prices to support their labor costs, a cycle that can cause inflation to grow.5

While concerns about inflation and interest rates may be to blame for the market fluctuations, it may not be the only detail to focus on. Another key point is important to remember as an investor: Volatility is normal.

 

Volatility Facts

Average Intra-Year Declines: Since 1980, the S&P 500 has experienced an average correction each year of approximately 14%. But in 2017, the markets were unusually calm, fluctuating only 3%.6 Before this recent decline, the S&P had gone more than 400 days without losing over 5%—its longest span since the 1950s.7

Takeaway: Markets fluctuate, and the recent lack of volatility is what’s truly unusual.

Percentages vs. Points: Many news articles mention that the Dow’s 1175-point drop on February 6 was its highest decline in history.8 While this statement may be true, it leaves out a key detail: The higher an index goes, the smaller a percentage of its total that each point represents. In other words, 1175 points doesn’t have the same impact at 25,000 that it does at 10,000.

Takeaway: Focus on percentages not points to gain a clearer view of market performance.

Recovery From Bad Days:  The S&P 500 fell 4.1% on February 5, but within one day, the index regained 1.7%.This performance surpasses historical data. If you analyze the S&P 500’s 15 worst days—where the index lost an average of 8.16%—stocks were still in negative territory 1 day later. But, in 13 instances, stocks were back up within a year by about 21%; they were always in positive territory 5 years later.10

Takeaway: Even when stocks lose more ground than they just did, they recover and positive performance returns.

Remembering the Last Market Correction

In August 2011, the S&P 500 lost 6.66% in one day. At that time, the European debt crisis was in full swing, the U.S. had lost its AAA credit rating, and the financial sector was reeling. Volatility measures indicated that many investors were becoming worried.11

Facing that situation, impulses to leave the market and avoid further losses could have arisen. As is so often the case, however, staying invested paid off.

Only a year later, the S&P 500 had gained over 25%.12

 

Knowing Where to Go From Here

Over  short periods of time, the market trades on fear, anxiety, greed, and emotion. Over the long term, however, economic fundamentals drive the markets.

Thankfully, a variety of data indicate that the economy continues to grow:

Labor Market: The economy added 200,000 new jobs in January and beat expectations. Average hourly wages also increased, bringing 2.9% growth in the past 12 months—the largest rise since 2008–2009.13

Corporate Earnings: The majority of S&P 500 companies who have reported their 4th quarter results have beaten their earnings estimates.14

Service Sector: The latest reading of the ISM Non-Manufacturing Index (which tracks performance and expectations for service-sector businesses) hit its best level since 2005.15

Consumers: The most recent data indicates that personal income and spending are on the rise.16

 

As investors try to determine whether inflation is on the rise and higher interest rates are imminent, volatility could continue. After last year’s smooth sailing in the markets, these fluctuations may feel harder to withstand. The reality is that equities don’t move in a straight line.

Even if volatility is here to stay, we know that price changes can provide new market opportunities. We agree with the economists at First Trust who assert that, “More economic growth will ultimately be a tailwind for equities, not a headwind.”17

We encourage you to focus on your long-term goals, rather than short-term fluctuations. As you do, avoid allowing emotions to derail your plans. We also want you to feel comfortable in your financial journey.

As always, we are here to provide you with clarity, perspective, and support during every market environment. Thank you for the confidence you place in our abilities. We consider it a privilege to be good stewards of the assets you entrust to our care.

[1] https://www.bloomberg.com/news/articles/2018-02-02/stocks-in-rate-wringer-with-rout-raising-existential-questions

[1] http://money.cnn.com/2018/02/05/investing/stock-market-today-dow-jones/index.html

[2] https://www.cnbc.com/2018/02/06/us-stock-futures-dow-data-earnings-market-sell-off-and-politics-on-the-agenda.html

[3] https://www.cnbc.com/2018/02/05/why-the-stock-market-plunged-today.html?recirc=taboolainternal

[4] https://www.theguardian.com/business/2018/feb/02/us-bond-market-rout-fears-trigger-wall-street-sell-off

[5] First Trust, Staying the Course, 12/31/17

[6] https://www.reuters.com/article/us-global-markets-volatility/explainer-investors-burned-as-bets-on-low-market-volatility-implode-idUSKBN1FQ2GL

[7] http://www.cnn.com/2018/02/06/us/five-things-february-6-trnd/index.html

[8] https://www.cnbc.com/2018/02/05/fidelity-says-it-saw-no-panic-among-its-customers-and-more-buying-than-selling-during-the-plunge.html

https://www.cnbc.com/2018/02/06/us-stock-futures-dow-data-earnings-market-sell-off-and-politics-on-the-agenda.html

[9] First Trust, S&P 500 Performance After Its Worst Days, 6/17

[10] First Trust, S&P 500 Performance After Its Worst Days, 6/17

http://money.cnn.com/2011/08/10/markets/markets_newyork/index.htm?iid=EL

[11] First Trust, S&P 500 Performance After Its Worst Days, 6/17

[12] https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/2/nonfarm-payrolls-rose-200,000-in-january

[13] https://insight.factset.com/sp-500-earnings-season-update-february-2

[14] https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/5/the-ism-non-manufacturing-index-rose-to-59.9-in-january

[15] https://www.ftportfolios.com/Commentary/EconomicResearch/2018/1/29/personal-income-rose-0.4percent-in-december

[16] https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/5/new-policies,-new-path

[17] https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/5/new-policies,-new-path

Ten Steps to 401k Success

by Sergio Mariaca on Jan 23, 2018 11:38:47 AM |Share:

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The 401(k) plan is becoming the single largest source of retirement savings for a majority of American workers. According to the Society of Professional Administrators and Recordkeepers (SPARK), over 55 million people participate in 401(k) plans.  If you participate in a 401(k) plan, the good news is that you have more control over your retirement money.  The bad news is that you have more control over your retirement money.

For people who do not have the time or the financial knowledge, properly managing your 401(k) plan can be a daunting task. Moreover, if you do not manage it properly, the 401(k) can become, at best, a savings account and, at worst, a high-risk gamble with your retirement money.

Mariaca Wealth Management, LLC, a 401(k) advice and asset management company, recommends ten steps that have helped thousands of corporate employees succeed with their 401(k). If you lack the time or inclination to manage your own account, they will actively manage it for you. However, if you are the do-it-yourself type, these ten steps will help.

  1. Participate

The dollars in your 401(k) plan may represent 20-80% of your income at retirement. The government, and by extension, your employer, are giving you the opportunity to take advantage of two very powerful financial concepts: the ability to save money on a pre-tax basis, and the tax-deferred, compounded growth of those dollars. A 401(k) enables you to build a better nest egg than anything else you can do on your own because of that tax-deferred growth. Saving money before it is included in your taxable income reduces your annual tax bill. In addition, the earnings can grow on a tax-deferred basis, meaning you can earn money on your earnings!  If your company offers a 401(k) plan, you need to be contributing, as soon as you can, and as much as you can. It is the first step in taking charge of your financial future.

In order to help you increase the size of your nest egg, as well as to encourage reluctant employees to save for retirement, many employers offer matching funds.  The average employer offers a match of 50% of the amount you contribute up to 6% of your eligible salary. In the complex world of finances, we call this free money. If your employer is willing to give you money, you need to take it!

The only catch is that you must contribute some of your own money in order to receive the company match. If your employer matches up to 6%, you should be contributing at least 6%.  The goal is to capture the entire company match (and then keep working there until you’re fully vested).

  1. Determine your investor profile

Investor, know thyself! Every investor is different and knowing yourself is the first step to allocating your investments appropriately. Before you can determine your asset allocation strategy, you must first be able to clearly define your goals. Remember, 401(k) money is retirement money and everybody has different dreams about what their retirement will entail – traveling, boating, etc. Also, you may have some pre-retirement goals for which you need to save some money. Each goal may represent a separate pool of money and there are different investment options available to you to help fund each goal. Second, determine the time horizon for retirement. Is it more than 10 years away? In general, the longer you have until you need the money, the more heavily weighted you should be in stocks. You’ll have more time to recover any losses incurred during a market downturn. The third consideration concerns how psychologically comfortable you are with those market downturns. Will you really be able to tolerate the inevitable ups and downs that the stock market delivers?

  1. Allocate appropriately

Asset allocation is the principle of deciding how to spread your investments across various asset classes, such as stocks, bonds, and cash. There are subcategories within each class, such as small, medium and large cap stocks. The idea is to diversify your holdings in order to potentially increase returns while diminishing risk. A variety of factors determines the appropriate allocation for each individual – When you need the money (not automatically dictated by your retirement age), how much money you have now and expect to need later, what kind of risks you’re willing to take, and what other assets you have invested outside of your 401(k). Perhaps the most important factor is your time horizon – the more time you have, the more aggressive you can be.

  1. Limit exposure to company stock

Company stock can be a double-edged sword. On one hand, as a loyal employee who understands the business, you want to participate in the growth of the company by being a shareholder. On the other hand, it is risky to have too much of your portfolio in one stock. Having too much money in a single stock issue creates a non-diversified portfolio.  Most investors are able to reduce volatility significantly by having a diversified portfolio. Besides, do you really want the fortunes of one company to control your salary, benefits, pension and your 401(k)?

  1. Reallocate tactically

While it is not advisable to move your money around daily (market timing in general has not proven to be an effective strategy over the long haul), it is advisable to look at what your investments are doing from time to time. If one segment of the market has outperformed other segments significantly, then your portfolio is likely to be significantly out of balance.  In other words, if you wanted to have 70% of your money in stocks, and it has grown to represent 80% of your portfolio, you need to rebalance your portfolio. You may also need to consider other strategic moves if your mutual fund suffers from style drift, there’s a change in management, or if a similar fund with lower expenses becomes available.  Take a disciplined approach to monitoring your investment portfolio.

  1. Do not panic

Listening to the evening news, and hearing about the market changes on a daily basis, can cause even the most stalwart of investors to get nervous occasionally. Stocks fluctuate in value, it’s the nature of the beast. Just remember that you are investing in your 401(k) for the long term.  Although there are no guarantees that this will continue in the future, the direction of the stock market over the long term has been up.  There will continue to be downward dips and swings, which is why knowing how you’ll react to those swings is a factor to consider in your overall asset allocation. Selling when your investments are down is the best way to lock in your losses. Try to remember that patience is a virtue. Unless you believe that the investment cannot recover, it is usually better to hold on for the ride. In fact, it might be a good opportunity to buy more!

  1. Know your plan features

Every 401(k) plan has unique characteristics. To maximize your plan you need to know all your options. Your plan documents, distributed by your benefits department, will outline options such hardship withdrawals, loans, vesting schedule, limitations to moving money, and in-service withdrawals. Read this document carefully or have a financial advisor review it with you.

Most plans allow for hardship withdrawals. There are several tax and penalty issues associated with hardship withdrawals, so make sure you read your plan documents carefully and seek professional guidance.  If you use the option for hardship withdrawal, you may be suspended from the plan for a specified period.

The vesting schedule refers to the years of employment before the company match money becomes yours. Vesting schedules either are graded, meaning you get a percentage of the money in successive years of employment; or cliff, meaning you get all the money at once after no more than five years. Keep the vesting schedule in mind if you are thinking about quitting your job.

If the plan does not meet your investment needs, and it allows for in-service withdrawals, you can move some of the money into other vehicles, such as an Individual Retirement Account (IRA). An IRA gives you many options for investing your money, thereby enhancing your diversification abilities.

  1. Borrow judiciously – if at all

Early 401(k) plans had no provision for loans.  Providers added most loan provisions as an incentive to encourage greater participation – participants would be more likely to save for retirement if they could access the money before they retired.  This does not make loans an attractive feature!  Many people believe (often erroneously) that if the interest rate on the 401(k) loan is less than they would have to pay elsewhere, the 401(k) loan is a good deal.  That may be, but it does not take into consideration the real cost of the loan – the lost opportunity cost.  The money in your plan cannot grow if it is not there! If the investments in your plan are growing by 12%, that is what borrowing from the plan costs you, plus growth on that growth.  Another consideration needs to be the tax consequences of borrowing from your plan.  While you do not pay any taxes on the money when you borrow it, you do pay the loan back with after-tax dollars. Then, when you begin to take withdrawals at retirement, you pay taxes on those dollars again – you are paying taxes twice. If you do some calculations, you may find that borrowing from your plan is an extremely expensive option.  Borrow only if you must.

  1. Consider tax consequences of your actions

Most of the things we do in our financial lives have tax consequences.  In the case of the 401(k), you can avoid several negative tax consequences.  If you leave your current employer and want to take your 401(k) money with you, be sure to roll it over directly to an IRA or to another employer’s plan. You may leave it in your former employer's plan only if you have more than $5000 in your account. If you take a full distribution, you will pay federal and state taxes on the entire amount. If you are not yet 59 ½, you also will pay a 10% penalty. This could reduce your lump sum distribution to almost half its original value. It will not help your retirement nest egg. Do not take a lump sum at retirement, unless you need all the money at once. Take out only what you need, so the bulk of the portfolio can continue to grow tax-deferred. If you are over 70 ½, you must follow the Required Minimum Distribution rules. Rolling your money from your 401(k) to an IRA may make sense for a variety of reasons, and fortunately, an IRA rollover is not a taxable event.

  1. At retirement, balance your needs for income and growth

Most people should disregard the notion that when you retire you should move all your money into bonds and stay clear of the stock market. Inflation, even when it is under control, has a nasty way of ensuring that a dollar in the future will not buy what a dollar does today.  You must ensure that your investment holdings have the potential to outpace inflation, so that the income you receive from your investments can have the same purchasing power when you’re 85 as it does when you’re 65.  This means you should have a portion of your money in investments that have the potential to outpace inflation, such as stocks, regardless of your age.

The Importance of a 401k

by Sergio Mariaca on Jan 16, 2018 11:54:12 AM |Share:

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The 401(k) plan has become the single largest source of retirement savings for a majority of American workers.  The dollars in your 401(k) savings plan may represent a substantial portion of your income during retirement.

While the volatile markets have many people questioning the value of their 401(k), it is still one of the best ways to prepare successfully for retirement.

The government, and by extension, your employer, are giving you the opportunity to take advantage of two very powerful financial concepts: the ability to save money on a pre-tax basis, and the tax-deferred, compounded growth of those dollars. A 401(k) enables you to potentially build a significant nest egg because of that tax-deferred growth.

Saving money before it is included in your taxable income reduces your annual tax bill. In addition, the earnings can grow on a tax-deferred basis, meaning you can earn money on your earnings!  You need to join the plan, as soon as you can, and save as much as you can. It is the first step in taking charge of your financial future.

The Importance of the Right Allocation

The first step in the 401(k) process is to allocate your money among the investment options available within your 401(k) plan. If you do not allocate it properly, the 401(k) can become, at best, a savings account and, at worst, a high-risk gamble with your retirement money.

Asset allocation is the principle of deciding how to spread your investments across various asset classes, such as stocks, bonds, and cash. The idea is to diversify your holdings in order to potentially increase returns while diminishing risk. Many factors determine the appropriate allocation for each individual – when you need the money (not automatically dictated by your retirement age), how much money you have now and expect to need later, what kind of risks you’re willing to take, and what other assets you have invested outside of your 401(k).

While it is not advisable to move your money around daily (market timing has not proven to be an effective strategy over the long haul), it is advisable to look at what your investments are doing on a regular basis. If one segment of the market has outperformed other segments significantly, then your portfolio may be out of balance.  If you wanted to have 70% of your money in stocks, and it has grown to represent 80% of your portfolio, you need to rebalance. You may also need to consider other strategic moves if your investment suffers from style drift, there’s a change in management, or if similar investments with lower expenses become available. 

Footnotes, disclosures, and sources:

These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker Dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
We have not independently verified the information available through the following links. The links are provided to you as a matter of interest. We make no claim as to their accuracy or reliability.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Data Release: Fed holds the line on rates in November

by Sergio Mariaca on Nov 1, 2017 2:43:35 PM |Share:

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  • As expected, the Federal Open Market Committee (FOMC) left rates on hold at a target range of 1 to 1-1/4 percent.
  • The statement noted the disruptions to economic activity and inflation caused by the late-summer hurricanes. Outside of this, the overall economic outlook remained unchanged, the labor market continues to strengthen, but inflation remains "soft" and below its 2% target.

Key Implications

  • There is very little to comment on in this statement. As broadly expected, the Fed held the line on rates and noted, once again, the dilemma between a strengthening economy and stubbornly weak inflation.
  • The inflation outlook will be central to the conduct of monetary policy over the next year. As some of the idiosyncratic factors weighing on price growth diminish, and the unemployment rate continues to push further below its natural rate, inflation is likely to gain traction in the year ahead. The Fed should see enough evidence for this proposition when it meets next in December, allowing them to raise rates by 25 basis points.

 

TD.jpgJames Marple, Senior Economist

DISCLAIMER: 
This report is provided by TD Economics.  It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes.  The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.  The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs.  The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete.  This report contains economic analysis and views, including about future economic and financial markets performance.  These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties.  The actual outcome may be materially different.  The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

Lessons for the Next Crisis

by Sergio Mariaca on Oct 27, 2017 10:02:44 AM |Share:

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It will soon be the 10-year anniversary of when, in early October 2007, the S&P 500 Index hit what was its highest point before losing more than half its value over the next year and a half during the global financial crisis.

Over the coming weeks and months, as other anniversaries of major crisis-related events pass (for example, 10 years since the bank run on Northern Rock or 10 years since the collapse of Lehman Brothers), there will likely be a steady stream of retrospectives on what happened as well as opinions on how the environment today may be similar or different from the period leading up to the crisis. It is difficult to draw useful conclusions based on such observations; financial markets have a habit of behaving unpredictably in the short run. There are, however, important lessons that investors might be well-served to remember: Capital markets have rewarded investors over the long term, and having an investment approach you can stick with—especially during tough times—may better prepare you for the next crisis and its aftermath.

BENEFITS OF HINDSIGHT

In 2008, the stock market dropped in value by almost half. Being a decade removed from the crisis may make it easier to take the past in stride. The eventual rebound and subsequent years of double-digit gains have also likely helped in this regard. While the events of the crisis were unfolding, however, a future of this sort looked anything but certain. Headlines such as “Worst Crisis Since ’30s, With No End Yet in Sight,”[1] “Markets in Disarray as Lending Locks Up,”[2] and “For Stocks, Worst Single-Day Drop in Two Decades”[3] were common front page news. Reading the news, opening up quarterly statements, or going online to check an account balance were, for many, stomach-churning experiences.

While being an investor today (or during any period, for that matter), is by no means a worry-free experience, the feelings of panic and dread felt by many during the financial crisis were distinctly acute. Many investors reacted emotionally to these developments. In the heat of the moment, some decided it was more than they could stomach, so they sold out of stocks. On the other hand, many who were able to stay the course and stick to their approach recovered from the crisis and benefited from the subsequent rebound in markets.

It is important to remember that this crisis and the subsequent recovery in financial markets was not the first time in history that periods of substantial volatility have occurred. Exhibit 1 helps illustrate this point. The exhibit shows the performance of a balanced investment strategy following several crises, including the bankruptcy of Lehman Brothers in September of 2008, which took place in the middle of the financial crisis. Each event is labeled with the month and year that it occurred or peaked.

Exhibit 1: The Market’s Response to Crisis
Performance of a Balanced Strategy: 60% Stocks, 40% Bonds (Cumulative Total Return)

lessons for the next crisis pic.png

In US dollars. Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy: 12% S&P 500 Index,12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Marketwide Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% Citigroup World Government Bond Index 1-5 Years (hedged), 10% Citigroup World Government Bond Index 1-3 Years (hedged), 10% BofA Merrill Lynch 1-Year US Treasury Note Index. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2017 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Citigroup Indices used with permission, © 2017 by Citigroup. Bloomberg Barclays data provided by Bloomberg. For illustrative purposes only. Dimensional indices use CRSP and Compustat data. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Rebalanced monthly. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See Appendix for additional information.

Although a globally diversified balanced investment strategy invested at the time of each event would have suffered losses immediately following most of these events, financial markets did recover, as can be seen by the three- and five-year cumulative returns shown in the exhibit. In advance of such periods of discomfort, having a long-term perspective, appropriate diversification, and an asset allocation that aligns with their risk tolerance and goals can help investors remain disciplined enough to ride out the storm. A financial advisor can play a critical role in helping to work through these issues and in counseling investors when things look their darkest.

 

Conclusion

In the mind of some investors, there is always a “crisis of the day” or potential major event looming that could mean the beginning of the next drop in markets. As we know, predicting future events correctly, or how the market will react to future events, is a difficult exercise. It is important to understand, however, that market volatility is a part of investing. To enjoy the benefit of higher potential returns, investors must be willing to accept increased uncertainty. A key part of a good long-term investment experience is being able to stay with your investment philosophy, even during tough times. A well‑thought‑out, transparent investment approach can help people be better prepared to face uncertainty and may improve their ability to stick with their plan and ultimately capture the long-term returns of capital markets.

 

 

APPENDIX

Balanced Strategy 60/40

The model’s performance does not reflect advisory fees or other expenses associated with the management of an actual portfolio. There are limitations inherent in model allocations. In particular, model performance may not reflect the impact that economic and market factors may have had on the advisor’s decision making if the advisor were actually managing client money. The balanced strategies are not recommendations for an actual allocation.

International Value represented by Fama/French International Value Index for 1975–1993. Emerging Markets represented by MSCI Emerging Markets Index (gross dividends) for 1988–1993. Emerging Markets weighting allocated evenly between International Small Cap and International Value prior to January 1988 data inception. Emerging Markets Small Cap represented by Fama/French Emerging Markets Small Cap Index for 1989–1993. Emerging Markets Value and Small Cap weighting allocated evenly between International Small Cap and International Value prior to January 1989 data inception. Two-Year Global weighting allocated to One‑Year prior to January 1990 data inception. Five-Year Global weighting allocated to Five-Year Government prior to January 1990 data inception. For illustrative purposes only.

The Dimensional Indices used have been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to their index inceptions dates. Accordingly, results shown during the periods prior to each Index’s index inception date do not represent actual returns of the Index. Other periods selected may have different results, including losses.

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 was created by Dimensional in March 2007 and is compiled by Dimensional. It represents a market‑capitalization‑weighted index of securities of the smallest US companies whose market capitalization falls in the lowest 8% of the total market capitalization of the Eligible Market. The Eligible Market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: Non-US companies, REITs, UITs, and investment companies. From January 1975 to the present, the index also excludes companies with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Source: CRSP and Compustat. The index monthly returns are computed as the simple average of the monthly returns of 12 sub-indices, each one reconstituted once a year at the end of a different month of the year. The calculation methodology for the Dimensional US Small Cap Index was amended on January 1, 2014, to include profitability as a factor in selecting securities for inclusion in the index.

Dimensional US Small 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 whose relative price is in the bottom 35% of the Dimensional US Small 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 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 1975: Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market whose relative price is in the bottom 25% of the Dimensional US Small Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price.

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 Index was created by Dimensional in April 2008 and is compiled by Dimensional. July 1981–December 1993: It Includes non-US developed securities in the bottom 10% of market capitalization in each eligible country. All securities are market capitalization weighted. Each country is capped at 50%. Rebalanced semiannually. January 1994–Present: Market-capitalization-weighted index of small company securities in the eligible markets excluding those with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of a different quarter of the year. Prior to July 1981, the index is 50% UK and 50% Japan. The calculation methodology for the Dimensional International Small Cap Index was amended on January 1, 2014, to include 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 1994: Created by Dimensional; 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.

Dimensional Emerging Markets 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 Emerging Markets Value Index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. Prior to January 1994: Fama/French Emerging Markets Value Index.

Dimensional Emerging Markets Small Cap Index was created by Dimensional in April 2008 and is compiled by Dimensional. January 1989–December 1993: Fama/French Emerging Markets Small Cap Index. January 1994–Present: Dimensional Emerging Markets Small Index Composition: Market-capitalization-weighted index of small company securities in the eligible markets excluding those with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of a different quarter of the year. Source: Bloomberg. The calculation methodology for the Dimensional Emerging Markets Small Cap Index was amended on January 1, 2014, to include profitability as a factor in selecting securities for inclusion in the index.

[1]. wsj.com/articles/SB122169431617549947.

[2]. washingtonpost.com/wp-dyn/content/article/2008/09/17/AR2008091700707.html.

[3]. nytimes.com/2008/09/30/business/30markets.html.

Source: Dimensional Fund Advisors LP.

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