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Q4/2013: Quarterly Market Review Summary

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Watch Mark's 2013 Q4 Market Review Video

 

Overall, it was a very good quarter for equities, the one exception being real estate investment trusts (REITs) which were down 1%. U.S. bonds were down slightly, but Global bonds showed a gain of 0.44%.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2014, all rights reserved. MSCI data © MSCI 2014, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2014 by Citigroup. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield

 

The quarter began with the shutdown of the U.S. government which lasted through October 16th, but as seen below, the market shrugged it off. On the international front, the biggest story of the fourth quarter was the announcement of the Iran nuclear accord.

Returns in US dollars. Graph Source: MSCI ACWI Index. MSCI data © MSCI 2014, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Selected headlines are not indicative of any impact they may or may not have had on the market.  Past performance is not a guarantee of future results.

 

The pie chart below shows the breakdown of the total global market capitalization of $41.6 trillion among U.S., International Developed, and Emerging Markets.

Source: Dimensional Funds Advisors.

 

Could you have guessed how the fourth quarter returns would have unfolded based on third quarter returns? The chart below tells you the answer.

Sources, Disclosures and Updates: ifabt.com.

 

Looking back at all 20 quarters starting from 2009, there is no reliable way of predicting next quarter’s winning asset class.

Sources, Disclosures and Updates: ifabt.com.

 

Nevertheless, the relationship between risk and reward held steady from the third quarter to the fourth quarter.

Sources, Disclosures and Updates: ifabt.com. Returns shown net of 0.90% IFA Advisor Fee.

 

The relationship between risk and reward was equally clear in the first quarter.

Sources, Disclosures and Updates: ifabt.com. Returns shown net of 0.90% IFA Advisor Fee.

 

While risk was rewarded in 2012 and 2013, it was punished in 2011, but there have to be some periods in which that happens, or it would not be risk, and no investor would expect to be paid for bearing it.

Sources, Disclosures and Updates: ifabt.com. Returns shown net of 0.90% IFA Advisor Fee.

 

For the past 3, 5, and 10 years, the risk/reward relationship is also quite apparent.

Sources, Disclosures and Updates: ifabt.com. Returns shown net of 0.90% IFA Advisor Fee.

 

The long-term data clearly shows the relationship between risk and reward, especially in the growth of wealth.

Sources, Disclosures and Updates: ifabt.com. Returns shown net of 0.90% IFA Advisor Fee.

 

In closing, the fourth quarter of 2013 (and 2013 itself) was a period where anybody who was not invested at their risk capacity™ missed out badly.

 

Returns shown net of 0.90% IFA Advisor Fee