Featured entries from our Journal

Details Are Part of Our Difference

Embracing the Evidence at Anheuser-Busch – Mid 1980s

529 Best Practices

David Booth on How to Choose an Advisor

The One Minute Audio Clip You Need to Hear

Tag: market volatility

Reframe the Average

It takes only a glance at Dimensional Fund Advisors’ 2018 market summary to recognize global markets didn’t leave anyone applauding in the end. The volatility put the popular press in a tizzy (with no certainty on what lies ahead). Not surprisingly, our response has been to double down on our perspective on how to maintain “unruffled serenity” in volatile markets.

Click to enlarge

For example, in our fourth quarter client letter, we revisited an important, annually updated Dimensional chart depicting yearly market premiums since 1928. We’ve shared similar charts before, but it remains worth repeating whenever the going gets tough. As we wrote in our letter, “No one complains when they finish the year with stock returns much higher than average, but the typical investor has a hard time handling a big down year.”

We share an excerpt from our client letter today, hoping we can help you, too, Take the Long View®.


January 2019

Unruffled Serenity and Taking the Long View

Why would an investor want to accept wild, short-term swings in the markets? Because investors are paid for enduring those swings. It’s that simple and that hard.

Because stocks ended 2018 with a series of dramatic gyrations, we decided to illustrate just how normal these big market movements really are. The following chart, which shows the annual performance of the U.S. stock market since 1928, illustrates why it’s worth maintaining a long view and disciplined investment strategy.

Click to enlarge

The blue bars indicate years in which the broad U.S. market delivered an average return above T-bills (i.e., a positive premium). The dark blue bars indicate years when a positive equity premium was within a 2% range of its long-term average (represented by the dotted black line). On the other side, the red bars indicate years in which the market underperformed T-bills (i.e., a negative premium).

The first thing to notice is that on average, the annual market premium has been strongly positive and there have been more years of overperformance than underperformance. But in any given year, the U.S. market premium has varied widely—sometimes producing extreme positive or negative performance relative to T-bills. It’s worth repeating: The premium has been within 2 percentage points of the long-term annual average in only four years since 1928.

As savvy long view investors, we know that if we want a long-term average annual premium from the equity portion of our portfolios we have to expect and endure returns in any given year that are wildly above or below that average. No one complains when they finish the year with stock returns much higher than average, but the typical investor has a hard time handling a big down year. What separates us is knowing that we win over the long run by embracing this volatility. We win because in the boring math of investing, the long-term owner of global capitalism is likely to end up in the top decile of all investors. It’s simple, but it ain’t easy. Maybe we should call it a serenity premium?

Unruffled Serenity

A “Royal Ease” Pose (photo by Matt Hall)

Unruffled serenity. We love that expression. It’s exactly what we seek to bring to our clients – especially when the volume of market noise rises to a roar, as it has in the latter half of 2018. We can’t claim credit for the phrase, though it does pair with our own tagline, Take the Long View®. Both are aimed at detaching emotions from market swings, whether high or low. The long-term view has always sloped up and to the right, but in the short run it’s unpredictable.

Who else can help bring a sense of calm in these times? We point you to Jason Zweig of The Wall Street Journal. Ever since Zweig launched his Intelligent Investor column a decade ago (succeeding the equally adept Jonathan Clements), it’s been far easier to list his few underwhelming columns than the vast majority we’ve enjoyed. His brilliant book, “Your Money & Your Brain” also has a permanent place on our recommended reading list.

As high a bar as Zweig has set for himself, we were particularly pleased by his recent column on market volatility and a behavioral bias known as herd mentality. The article explores a volume of evidence suggesting investors and even portfolio managers are strongly influenced by the “emotional contagion” of their neighbors. This results in market participants in communities, cities and even states mimicking one another’s trading habits, often to their detriment.

“Investors probably behave like their neighbors because gossip, news and beliefs spread by word of mouth,” says Zweig.

His suggested antidote to catching this communicable “disease” strongly reflects our own. Pointing to investment legend and economist Benjamin Graham (Warren Buffett’s mentor), Zweig describes how Graham went out of his way to cultivate “unruffled serenity,” strengthened by “a certain aloofness,” to ward off the constant peer pressure to react to random market noise.

Zweig concludes:

“With markets gyrating, unruffled serenity may become important again. If volatility scares you, spend more time with family and friends who don’t obsess over stocks. You’ll be happier now—and, probably, richer later on.”

A Closer Look at Global Diversification

We frequently mention the importance of employing global diversification to manage investment risks while pursuing expected returns. The broad concept is simple: Don’t put all your eggs in one basket.

That said, beyond the simple adage, questions may remain. A recent Dimensional Fund Advisors paper addressed one of them: Since U.S. stocks have outperformed international and emerging markets stocks over the last several years, is it still worthwhile to invest worldwide?

Click to enlarge

If you’d rather skip to the compelling conclusion, the short answer is, yes, global diversification is still worth it. Not only do the last several years tell us nothing about the next several years, they could lull U.S. investors into a false sense of home-biased complacency. To emphasize this point, we need only point to the 2000–2009 “lost decade,” when the S&P 500 took a depressing 10-year dive, while most of the world’s indexes soared.

Bottom line: You never know where your next source of best returns will be found, so it’s best to go global – and stay that way.

Featured entries from our Journal

Details Are Part of Our Difference

Embracing the Evidence at Anheuser-Busch – Mid 1980s

529 Best Practices

David Booth on How to Choose an Advisor

The One Minute Audio Clip You Need to Hear

Hill Investment Group