Charting a Good Value Story

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Your actual experience with an asset class investing strategy like ours will vary from every other Equius client’s. But your expected experience will be almost identical. That’s what we strive for by adhering to a set of fundamental investing principles. 

Differences in your performance, emotions, short-term expectations, perception of risk, and so on depend on when you started, how often and how much you contribute or withdraw from your portfolio, your mix of asset classes, the amount of intellectual capital you invested along with your financial capital, and other important and unique factors.

For this reason, Asset Class adheres to a writing style that emphasizes foundational investment principles applied across all client relationships, while also offering unique perspectives that influence our and our clients’ behavior in productive ways. In other words, when principles and methods remain consistent—for good reason—the challenge is to present them in various ways within the current market context. 

While this approach can come across as repetitive and boring to clients, we remain steadfast in our belief that it is an essential practice in order to continuously promote the discipline necessary to have a successful investment experience. I’ve seen enough market cycles and changes in asset class leadership to tell you that the discipline of even those who “get it” can be tested. 

The two charts on the right offer such a perspective. The data in the top chart is presented in the linear scale favored by the mainstream financial press (perhaps because more recent trends appear more dramatic). The bottom chart shows the data plotted on a logarithmic scale, which is a more realistic and therefore more appropriate way to view long-term data.*

Both charts show the growth of $1.00 for a 60/40 mix of the Dimensional US Large Cap Value and Dimensional US Small Cap Value funds (blue line), the S&P 500 Index (green line), and the Russell 1000 Growth Index (tan line) from January 1995 to November 16, 2020.

For the first 2¾ years of this period, there was no difference in performance between these three investment options, and all performed exceptionally well (over 30% annualized!). But starting in October 1997, investor sentiment changed dramatically in favor of large growth stocks. Until they peaked in August 2000, those stocks rose 19.1% annually compared to 5.5% for the 60/40 mix of large and small value stocks (first shaded area). 

For the next 20 years, from September 2000 to the end of last month, the 60/40 mix outperformed the S&P 500 by 1.8% per year (7.7% versus 5.9%). It took the COVID-19 pandemic that started early this year (and the investor stampede to large growth companies) to finally push the 60/40 value mix line below the large growth stock indexes. Still, the incredibly strong performance of small cap and value stocks so far this month has already narrowed that gap. Based on this modern history (and data back to 1926), should we reasonably expect this “recovery” in value stocks to continue? 

Do these charts suggest that we’ve been riding the wrong horse all these years and that the commonsense belief in a direct link between risk and return in a vibrant and free market is delusional? Should we have exposed your serious assets to the subjective, emotional, and destructive instability of market timing? 

These are the questions we try to answer for you in every issue of Asset Class. We hope it helps. 

*You can read more about the differences in linear and log charts here. 

Equius Partners, Inc. is a Registered Investment Advisor.

Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.

Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

© 2023 Equius Partners, Inc.

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