2022 Performance Perspective

Print Friendly, PDF & Email

We’re in the midst of an asset class leadership change that started in the last half of 2020. Before I go there, however, take a look at the performance last year of a select group of popular growth companies compared to how they performed the year before (Table 1). Last year was clearly not the time to shift allocations to large growth stocks. Looking at those numbers, it’s a bit surprising to observe the S&P 500 Index down only 18.1% for the year—until you notice that the energy sector (not shown) was up 65% due to a sharp and unpredictable rise in oil prices. Diversification works. 

Of course, for reasons I’ve articulated many times in previous articles, our focus is on asset class, not sector, diversification. Using the DFA asset class mutual funds as proxies for each asset class, we can observe returns over the past two-plus years (Table 2). Short-term bond returns were clearly the laggards due to rising rates.

Opening the lens further (Table 3) shows returns since 1995 (the year we fully implemented our long-term asset class strategy). For US asset classes, these returns are very close to what our expectations were then based on the long-term data. The lower large and small value stock returns over the 28 years shown can be attributed to what I call “end-period bias.” This is when extraordinary recent returns, either up or down, skew longer-term returns away from what we would normally expect from a risk-based strategy like ours. 

Investors tend to fall into end-period bias traps when looking only at recent 3-, 5-, and even 10-year annualized returns. Investors were drawn to large growth stocks in droves because of this bias during the earlier dot-com craze. They repeated that behavior in recent years for many of the same reasons and have paid a high price. 

We’re disappointed with the returns of international stocks (and bonds over the past couple of years), but we look forward to better returns in the future. Smart asset class diversification and rebalancing make a powerful strategy combination for long-term investors—clearly better than guessing our way through market cycles. We just have to take some of the bad with the good. 

DFGBX = DFA Five-Year Global Fixed Income Portfolio, DFLVX = DFA US Large Cap Value Portfolio, DFSVX = DFA US Small Cap Value Portfolio, DFIVX = DFA International Value Portfolio, DISVX = DFA International Small Cap Value Portfolio, DFEMX = DFA Emerging Markets Portfolio, and DFREX = DFA Real Estate Securities Portfolio. *Five-Year US Treasury Notes, S&P 500 index, Dimensional US Large Cap Value Index, and Dimensional US Small Cap Value Index. 

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.

Interested in reading more by Jeff Troutner? Click here.
Or reach out to Jeff directly through e-mail.