| Nov 10, 2014
In spite of a mid-month plunge in global stock prices, upbeat economic and corporate news lifted the S&P 500 Index to close October at an all-time high, notably returning 2.44% for the period.
The sell-off, the worst in two years, resulted from concerns over global growth, falling oil prices and the stronger US dollar. Though volatility spiked during the period, in the end the S&P 500 VIX short-term futures index declined 2%. The S&P MidCap 400 and the S&P SmallCap 600 both delivered strong performances and gained 4% and 7% respectively.
International developed markets ended the month down 1.45%. Australia had a remarkable October, returning 5%, while Europe lost 2.64%. Emerging markets returned 1.2%, performing better than overseas developed markets. Overall, developed markets finished up 4.56% YTD, but if we were to exclude the 10% YTD returns for the US broad market, then the overall increase for the developed markets would sum up to a loss of 2.23%. The take home point is to remain broadly diversified, long-term oriented, mindful of the big picture and resistant to a myopic fixation on short term losses.
US fixed income indices delivered strong performances across the board. The yield on the 10-year Treasury note ended October lower at 2.34%. The S&P/BGCantor Current 10-Year US Treasury Index rose 1.70% in October registering 8.93% YTD returns. The S&P/Citigroup International Treasury ex-U.S. Index fell 0.69% last month and closed the period down by 0.11% YTD. The S&P Municipal Bond Investment Grade Index finished October up by 0.6%, outperforming the S&P Municipal Bond High Yield Index, which closed down 0.03% in October.
Commodities continued the negative trend seen in recent months. Agriculture was the top performer as it gained 9%. Driven largely by declining oil prices, the performance of the energy sector continued on its downward trend. Thanks to record high US commercial property prices, domestic REITs returned an impressive 10.7% for the month.
In The News:
From the Print Edition | August 2, 2014
As the Federal Reserve bond buying reaches its end, a shift in focus is underway. When interest rates start rising, how high will they go? The general view is that rates will remain low by historical standards. Given that short-term rates are below five-year yields, this suggests that investors do not anticipate either a return to the robust economic growth or resurgence in inflation.
Rate Rises Aren’t All Bad For Long – Term Bond Investors
Russell Investments | October, 2014
A rate rise could hurt bond portfolios in the short-term. But longer-term, higher future interest payments can compensate investors for short-term losses. Staying invested in bonds as rates rise may offset an initial loss and could even be more beneficial to your portfolio than if rates had never risen.
From the Print Edition | September 13, 2014
The way investors choose fund managers may cause anomalies in the markets. Dreams can turn into nightmares, beware of “trend following” or “momentum strategies”; they can work, but mainly they are likely to produce disappointing returns over the long-term. Trend following strategies exacerbate price distortions, raise volatility of overvalued assets and generate a negative relationship between risk and return.
Gross and Net Returns
From the Print Edition | October 4, 2014
When active fund managers perform well, they attract clients and the fund gets bigger. Eventually, however, the fund will stumble. This is a continuing issue. An active fund’s worst year will probably occur when it is at its biggest. The last clients to jump on the bandwagon will be those who earn the weakest returns. The same rules do not apply to passive funds, which explicitly try to match the index. With passively managed funds, a bigger fund should lead to economies of scale which can be passed on to clients in lower fees.
Trading More Frequently Leads to Worse Returns
An Interview with Terrance Odean
From the Print Edition | November, 2014
On average, stocks bought by investors went on to underperform the stocks they sold. Some people erroneously assume that a great business translates into a very good investment. For example, we all know Apple is a great company. But the relevant question to ponder is whether the company is better than the market thinks it is? Investors who actively trade should think about who is on the other side of the transaction. Terrance Odean is a Professor of Finance at the Haas School of Business at the University of California, Berkeley.
Don’t Over-Rely on Historical Data to Forecast Future Returns
An Interview with William Sharpe
From the Print Edition | October, 2014
Ratios measuring risks and actively managed returns can provide a helpful first look at past performance, but give imperfect estimates of future returns. Emphasizing indexing and asset allocation remains the preferred way to invest. We know that in any given period, after cost, the average actively managed dollar is going to underperform a low-cost index fund. William Sharpe is a Professor of Finance, Emeritus, at Stanford University, and the recipient of the 1990 Nobel Prize in Economic Sciences.
What Goes Up Must at Least Slow Down
New York Times
By Jeff Sommer | November 2, 2014
After a five-year surge for stocks, a forecaster says now is the time to temper expectations. In a nutshell, expect lower stock returns than you may have received in recent years. Be steady, be diversified — and be prepared for problems, even if they are caused by good news.
Private Equity, High Fees and High Risk
Cardiff Park Advisors
By John Gorlow | October 26, 2014
While private equity can generate impressive returns, once these returns are adjusted for high risk and excessive fees, there is virtually no chance for the manager to add return over what the market would have delivered anyway. Not to mention that if some manager were lucky enough to generate some additional spoils, these would tend to go to the manager and not to the investor. All that shines is not gold. Investors beware.
How Much Do You Need to Save for Retirement?
Dimensional Fund Advisors | October 23, 2014
In this video, Massi De Santis, PhD, explains that the answer should be customized for each individual, based on how their income grows prior to retirement.