August 2, 2013


Investment Newsletter for the end of July, 2013


The market made fabulous gains this month.  The Dow was up almost 600 points for the month and almost 2400 points year to date.  In percentage terms, 4% per the month and over 18% year to date.

The Dow, however, is an almost meaningless measure for the stock market.  The Dow is an average of 30 big industrial companies.  It is not the entire stock market.  Different parts of the stock market behave in different patterns and with different rates of return.  Historically, large cap companies have worse return than the general market.  Small cap and value will out perform the general market.  It is not a free lunch, however.  If small cap does better, there must be a cost.  The cost, in this case, is higher risk.  When the market goes down, small cap goes down more.

So how did you do?  The engine of most of my portfolios is the DFA Small Cap Value Fund.  It went up 7.34% for the month and 26.17% year to date.  Roughly half again better than the Dow.  Again, there is no free lunch.  This fund can and will go down sharply.  We just do not know when.  A week ago, I engaged in rebalancing the portfolios.  For most of you that meant selling pieces of this small cap value fund and buying more boring short term bond funds.  I am very aware of the risk of downturns and by rebalancing I am trying to control this risk.

Two other funds are worth mentioning in terms of my approach.  DFREX is DFA’s real estate fund.  It invests in various reits; essentially commercial real estate like shopping centers, apartments, etc.  Contrary to what my real estate heavy clients believe, I am not anti real estate.  I do not see wealth management as either real estate or stocks.  I see real estate as a class of investments that goes up and down.  I see real estate as a necessary part of the total portfolio.  But real estate had lousy returns this year.  DFREX went up this month only .87%, year to date up only 5.69%.  Obviously, stocks this year way outperformed real estate.  So that fact means to me that I need to buy more real estate.  In my mind, what is coming is a period where real estate outperforms stocks.  They take turns that way.  You will see my actions in the rebalancing.

The other fund to discuss is the class of inflation adjusted bond funds.  They are not risk free.  They are actually fairly high risk.  Periodically, the funds are adjusted for inflation.  The market is also constantly adjusting them for interest rate changes.  They are generally long term bonds holdings.  The pricing of these holdings can have very large swings with the changes in interest rates.  Interest rates go up and down at different times than inflation.  They are both somewhat manipulated numbers by the Fed.  The result is that these funds will bounce around a lot.  DIPSX is DFA’s version of this fund.  It is down 7.6% this year, because interest rates are creeping up.  The Fed was keeping interest artificially low.  Inflation has not happened much yet.

I appreciate your business and trust.  Please call me with any issues at any time.

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