2022 was very challenging as both stocks and bonds were down. The lowered performance was almost exclusively in the first half of the year. Compare the Full Year results across the same asset classes to Q4 2022 below. What a contrast! Want to dig into more detail? See the entire Market Report here. See our standard portfolios performance here. See our social portfolios performance here.
Full Year 2022
4th Quarter 2022
As you may recall, we take advantage of long term premiums in the market, proven with statistical significance with nearly 100 years of data. (Those premiums are that small stocks outperform large stocks, value stocks outperform growth, higher quality stocks outperform lower quality.)
We use the term “evidence-based investing” since it is exactly that.
We remain highly diversified and tilt our portfolios with slightly higher exposure (weighting) to the premiums. These advantages are present most of the time, and can go in and out of favor for several years. When they go out of favor, they can come roaring back quickly, overcoming the period of underperformance just experienced quickly. This behavior is not unlike the overall market itself.
These premiums were in strong favor this last year in the stock funds we used and our clients benefitted.
These benefits help the fund family we prefer, the world’s best implementer of the concepts of evidence-based investing, Dimensional Fund Advisors (DFA), perform very well compared to the overall equity fund industry.
Performance data shown represents past performance and is no guarantee of future results. The sample includes funds at the beginning of each respective period ending November 30, 2022. Survivors are funds that had returns for every month in the sample period. Outperformers (winner funds) are funds that survived the sample period and whose cumulative net return over the period exceeded that of their respective benchmark. Each fund is evaluated relative to its respective primary prospectus benchmark. Where the full series of primary prospectus benchmark returns is unavailable, funds are instead evaluated relative to their Morningstar category index.
1. US-domiciled, USD-denominated open-end and exchange-traded fund (ETF) data is provided by Morningstar.
2. Dimensional fund data provided by the fund accountant. Dimensional funds or sub-advised funds whose access is or previously was limited to certain investors are excluded.
The “Holy Grail” on investing is beating benchmarks consistently over long periods of time since that leads to superior growth of wealth. It is very rare for any managers or companies to consistently beat their benchmarks. To have 88% of funds exceed their benchmarks is astounding and a testament to evidence-based investing.
Active managers, God love them, that attempt to choose the individual winning stocks have a particularly difficult time.
With the mathematics of compounding in play, incremental improvements in annualized returns MAGNIFY long term growth. That’s why we get excited about those results. The “premiums” that we enjoy cycle in and out, just like the market itself. Premium results vary over short time periods and can be exceedingly high or low or right at their long term average. Over years, the premiums are in effect overall and profoundly improving the compounding of wealth.
What will 2023 bring? Here are some things to watch for that will impact the results.
Can corporations maintain profits with the overall economy slowing due to interest rate hikes? (We’ll see market reactions to earnings reports early January to mid-March during earnings season.)
Will inflation readings and other economic measures continue to show inflationary pressures easing, and maybe even accelerating lower; i.e. accelerating disinflation?
What actual decisions will the Feds make regarding interest rates and how will they talk about it, because as we know, their words matter to the market speculators.
We will “officially” go into recession? If so, will it be deep enough to justify interest rate cuts.
Will the job market remain strong? If so, for how long. That’s important because as long as the job market is seen to be strong, the Feds will not be able to use jobs as a reason to be softer on interest rate hiking.
I’m always optimistic and I am particularly optimistic at the moment. Bonds will have a great year and we know they are paying more in dividends. The bad year has positioned bonds for years. Stocks will always be volatile, but will revert to their long term rate of growth. I just can’t tell you when, and they could still move lower before going higher.