July 2, 2014
Investment Newsletter for the end of June, 2014
It was a good quarter and all of you made a profit. How much profit depends on your particular allocation. Some portfolios are in riskier or are in more conservative structures than others.
It is a central theme of finance that there is a relationship between risk and return. As your portfolio takes more risk, you will earn more profit OVER TIME. If you accept little risk, then you will receive little return. Risk is the fluctuation in market price over short periods (months, quarters, maybe even a year). You cannot get more return unless you pay the cost (cost being the higher risk). This theme is sometimes called “there is no such thing as a free lunch.”
For this conversation, I going to compare three estimations of the market. The Dow Jones Industrial Average (the Dow which everyone thinks of when you say the “market”), the S & P 500 Index, and the Russell 2000 Value Index. None of these are really the market. They are samples of the market. The Dow is the 30 biggest US stocks. The S&P is the biggest 500 US stocks. The Russell 2000 Value is 2000 relatively smaller US stocks that also have a value tilt (in contrast to a growth tilt). The Russell 2000 Value is similar to the DFA small cap value fund that is in almost all your portfolios. It is a riskier group of stocks than the other two indexes.
This quarter, the Russell 2000 Value index went up 1.7%. This performance was substantially worse than the S&P 500 index which went up 4.69%. The Dow went up 2.2%. The Russell 2000 was the worst of the three and also the riskiest. That bad taste you are noticing right now is the cost of that risk.
For the year to date, the Russell 2000 Value index went up 2.52%. The S&P 500 index went up 6.05%. The Dow went up 1.5%. Once we lengthened the term from 3 months to six months, the Russell 2000 did better than the Dow but still worse than the S&P. How about 2013. For the calendar year, the Russell 2000 went up 37%. The S&P went up 29.6% and the Dow went up 26.5%. The Russell was clearly highest. Risk was then tasting sweet. And then finally for Jan 1, 2013 to June 30, 2014 (the full 18 month period to date), Russell outperformed again at an increase of 40.5%. S&P was at 37.4% and Dow at 28.4%. Very sweet results.
Risk is a cost and you paid with lower results this quarter. Risk also gave you far higher than normal return in 2013. Risk causes higher return over long terms. It also causes a wilder roller coaster ride over short periods.
If you have any questions or changes in your situation, please let me know. The portfolios need to reflect where you are in life. I need to change if your situation changes. You may also have questions as to the structure of your portfolio, my methods, tax, potential choices, etc. I am available almost always. Thank-you for your trust.
