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The Fourth Quarter of 2014 in Review

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In the fourth quarter of 2014, domestic equities had a strong showing, but foreign equities pulled back for both international developed and emerging markets. One major market-related story was the steep drop in oil prices, which decreased by about 41% for the quarter. Even though there were certain days when the market dropped along with oil prices, we see lower energy prices as a long-term tail-wind for both the economy and the market. During the quarter, the Federal Reserve stated it would take a “patient” approach to increasing interest rates in 2015, and the 10-year Treasury yield dropped from 2.51% to 2.17%. The dollar continued to strengthen during the quarter, explaining most of the negative returns for foreign equities. On the international front, Russia under Vladimir Putin is advancing on its territorial ambitions in the Ukraine and the sanctions combined with its collapsing economy could prompt Russia to pose a significant threat to America. And speaking of threats, the hack attack on Sony Pictures was but a small demonstration of the havoc that could be wreaked in a major cyber-attack.

Domestic Equities

For the different sizes and styles of domestic equities, the quarterly returns ranged from 2.70% for large value to 8.76% for small cap. The clear pattern for the calendar year 2014 is that large beat small and growth beat value.

For the blend of domestic equity indexes used in the new IFA Index Portfolios, the quarterly return was 5.36%, slightly ahead of the 5.22% return of the overall market. On a year-to-date basis, the return of the IFA blend was 6.73% vs. 12.56% for the overall market.

International (Developed) Equities

On the international front, the strengthened dollar contributed to the negative quarterly and year-to-date returns. For both the quarter and year, small value had the best return.

For the blend of international indexes used in the new IFA Index Portfolios, the quarterly return was -4.53%, and the year-to-date return was -6.09%.

Emerging Markets

Emerging markets followed a weak third quarter with an even weaker fourth quarter. After a strong second quarter, the third quarter emerged as a weak one for emerging markets across the board, perhaps prompted by continuing tensions with Russia and China. Only small caps had a positive return for 2014.

For the blend of emerging markets used in the new IFA Index Portfolios, the quarterly return was -5.27% and the return for 2014 was -0.73%.

Real Estate

Real estate delivered an especially strong fourth quarter return, and it had the highest 2014 return among all 15 asset classes used in the IFA Index Portfolios.

Fixed Income

The four fixed income funds used by IFA followed a clear pattern of higher duration funds delivering higher returns in the fourth quarter.

For the blend of fixed income used in the IFA Index Portfolios, the quarterly return was 0.39%, and the 2014 return was 1.19%. Once again, it is important to note that bond yields remain at low levels relative to their historical averages.

IFA Index Portfolios

Putting it all together, the returns of the IFA Index Portfolios are shown below, net of one quarter’s worth of IFA’s maximum annual 0.90% advisory fee for the quarterly numbers and the full 0.9% for the 2014 numbers.

Results not yet finalized

One important thing to keep in mind when reading these quarterly reviews is that one quarter (or even one year) is absolutely meaningless in determining overall relative performance among asset classes or portfolios consisting of those asset classes. The two charts below show how the probabilities (based on historical returns data) drastically change as the time period increases.