posted on October 14th 2020 in Market Commentary & San Diego CFP Team Posts & WorthPointe News with 0 Comments /

Our experiences are not only, by definition, our lives; they shape our outlook on our future potential and everything around us. Recent negative experiences can hold us back from achieving those things we want to accomplish in life—sometimes temporarily, or even for a lifetime. 

Conversely, recent positive experiences might cause us to be overexuberant, and one thing we know about life: it humbles everyone. 

With life, and investing, I think it’s essential to find a resilient foundation that helps us avoid being either overly pessimistic and overly exuberant. Buddhism describes a concept known as the “middle way” or “middle path” along with an explicit set of behaviors that help people stay on the path. The stated result is to lay a framework to stay away from extremes.  

If recent experience has caused you to become overly pessimistic or overly exuberant in life and investing, either mindset can become your biggest liability.

I think 2020 has already given us enough temptation to become overly pessimistic, so let’s look at the other side of the coin. Investors with some of the largest well-known companies in their portfolio have been rewarded in recent years. If they think this is something they should focus on moving forward with their investment strategy, they might have a case of being overly optimistic about their future returns based on recent history.

FAANG stocks (Facebook, Amazon, Apple, Netflix, Google [Alphabet]), are a classic example of these large companies that have had a lot of media hype about their recent returns—and for good reason. But, does that recent experience necessarily provide a basis for being optimistic about their future? Not necessarily.

As companies grow to become some of the largest firms trading on the US stock market, the returns that push them there can be impressive. But not long after joining the top 10 largest by market cap, these stocks, on average, lagged the market.

Intel is an illustrative example. The technology giant posted average annualized excess returns of 29 percent in the 10 years before the year it ascended to the top 10, but in the next decade, it underperformed the broad market by nearly 6 percent per year. Similarly, the annualized excess return of Google five years before it hit the top 10 dropped by about half in the five years after it joined the list. 

Here’s a graph illustrating this phenomenon. Five years after joining the top 10, these large stocks were, on average, underperforming the market—a stark turnaround from their earlier advantage. The gap was even wider 10 years out. 

[Graph Disclosures: Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. Named securities may be held in accounts managed by Dimensional. In USD. Source: Dimensional, using data from CRSP. Includes all US common stocks excluding REITs. Largest stocks identified at the end of each calendar year by sorting eligible US stocks on market capitalization. Market is represented by the Fama/French Total US Market Research Index. Annualized Excess Return is the difference in annualized compound returns between the stock and the market over the 3-, 5-, and 10-year periods, before and after each stocks’ initial year-end classification in the top 10. 3-, 5-, and 10-annualized returns are computed for companies with return data available for the entire 3-, 5-, and 10-year periods respectively. The number of firms included in measuring excess returns prior (subsequent) to becoming a top 10 stock consists of 38 (53) for 3-year, 37 (52) for 5-year, and 29 (47) for 10-year. Fama/French Total US Market Research Index: The value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American Depositary Receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. ]

So, should investors get their fangs out and bite into an investment strategy that emphasizes large company stocks because of their recent performance, or should they just get their FAANGs out of their portfolio? An advisor with access to good research can help answer this question and many others—as well as address a variety of misconceptions related to investing.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Bloomberg Barclays data provided by Bloomberg.

The indicated equity indexes around the world were positive for the third quarter of 2020, with Emerging Markets having the best return at 9.56 percent and Global Real Estate lagging at 2.37 percent, albeit still positive. 

One of the most interesting things to note is that the US stock market had a healthy 9.21 percent return this quarter even following its best quarter (2020 Q2: 22 percent) since January 2001. In April, I did not hear many voices, if any, forecasting that the market would have its best quarter in almost 20 years, followed by a quarter that returned 9.21 percent. This is another example of many illustrating the dangers of trying to time the market.

Interest rate changes were mixed in the US Treasury fixed income market during the third quarter. The yield on the 5-year US Treasury note decreased by 3 basis points (bps), ending at 0.31 percent. The yield on the 10-year US T-note rose by 3 bps to 0.64 percent. The 30-year US T-bond yield increased by 5 bps to 1.46 percent.

Changes in government bond interest rates in the global developed markets were mixed for the quarter. Longer-term bonds generally outperformed shorter-term bonds in global ex-US developed markets. Short- and intermediate-term nominal interest rates were negative in Japan, while all maturities finished the quarter in negative territory in Germany.


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This document may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of WorthPointe or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

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