If you were to listen in on client conversations I’ve had in the last few months, you’d recognize a theme. “I’m thinking of taking out more money”… ”I’d like to give a little more to charity”… “We’ve found a vacation home we’d like to buy”… ”We’re thinking about buying a bigger house”… ”We might want to retire a little sooner than planned.”
I can’t remember a single client commenting on how good portfolio returns have been over the last few years, but they’re saying it without saying it. Everyone feels wealthier and is thinking about ways they can enjoy their increased net worth. We’re reaping the rewards of asset class investing, our long-term investment plans, and our discipline to stick with them.
How good have recent returns been?
Let’s look.
Over the last five years, from October 2020 through September 2025, a globally diversified stock asset class portfolio has averaged a return of +17.8% per year; every $1 has grown to $2.27 before advisory fees. Things are even better if we look back to April 2020; from the bottom of the Covid decline, the stock asset class portfolio is up 20.9% annually over the last five and a half years, with $1 now worth $2.84.
The overall market, of course, has done well over the last five years—the S&P 500 Index gained 16.4%, so that’s helped. However, our asset class diversification choices also helped. A diversified US stock portfolio returned +17.4%, thanks to even better returns for small value stocks. The DFA US Small Value Fund is +19.6% per year, outperforming the S&P 500 by 3.2% annually—similar to the relative return differences between the two asset classes over the last century. And for the first time in recent memory, thanks to a very strong 2025, we can also say that global diversification has been beneficial as well. International large value stocks gained 18.7% per year, and international small value stocks gained 17.6%.
Not all investors—even those in diversified, low-cost index funds—have done nearly as well. In terms of small-cap value, the iShares Russell 2000 Value ETF returned only +14.4%, while the (supposedly superior) S&P 600 Value Index returned +14.0%; both returned more than 5% per year less than our chosen DFA fund. Internationally, the iShares MSCI EAFE ETF—a standard option for many investors and advisors, was up only 10.8% per year. Our value focus overseas yielded returns 7-8% higher per year.
How good is too good?
Clearly, the wind has been at our backs. But almost +18% annually? That’s well above our long-term expected return of +10% to +12% on an all-stock portfolio. Should this rising tide worry us? I don’t think so. This is what we expect from a diversified stock asset class portfolio. We should earn higher returns in “good” times to compensate for the occasional stumble—a -20% or more downturn, or a down year. +10% to +12%, even if it’s the long-term average, rarely happens in any given year. We overshoot on the upside for several years, and then experience a setback. The average of these periods has been +10%.
Looking back 30 years (to the inception of live DFA mutual fund data in 1995), we find several other five-year periods that resemble our recent experience. From 1995 to 1999, the globally diversified stock asset class portfolio gained +17.0% per year. From 2003 to 2007, it returned +19.6% annually. And from 2009 to 2013, a 19.1% increase. The last five years have been a completely average “up” market.
The periods in between (2000-2002, 2008, and 2014-September 2020) weren’t nearly as good, and in the case of 2008, downright awful. But my conclusion from the last three decades of live data, and the prior 70 years using indexes, isn’t that we need to focus on or try to avoid these temporary setbacks. We need to make sure we don’t miss any of the permanent advances. As long as you stay invested over a complete market cycle (a decline and then a recovery, or an advance that eventually sees a decline), you should earn a reasonably positive return. Miss out on a good few weeks or months, and even your long-term return will be significantly lower.
But is it different this time?
What about today? Stock prices are at all-time highs. Shouldn’t we take some money off the table? Build up our cash reserves and wait to deploy them when stock prices are lower? That sounds reasonable, right? Everyone seems to think so. On any given day, you could find articles in the Wall Street Journal or the New York Times advocating some version of this strategy. They just forget to call it what it is—market timing. And we know (because I’ve told you repeatedly) that market timing doesn’t work.
It’s not that we can’t figure out when stock prices are at all-time highs. It’s that high stock prices, or record highs, don’t reliably predict future declines or lower future returns. Consider the graphic from Dimensional Fund Advisors, which examined all 1-, 3-, and 5-year returns for the S&P 500 Index since 1926, following a month when stocks reached an all-time high. If any of these periods tended to be negative, we might consider taking action after a record stock run. We might want to sell stocks and avoid the high probability of decline. But we see just the opposite. Not only are stock returns reliably positive after they hit an all-time high, they’re just as high as all the other periods when stock prices don’t start at all-time highs!
We don’t think about missing positive returns as a loss; declining portfolio balances are easier to envision. However, consider the average 12-month return after stocks have reached all-time highs. Stocks averaged a gain of +13.7%. If you sell out, you will lose the opportunity to earn the 13.7% return. But unlike a temporary setback, it’s often the case that stock prices never retreat to the prior levels, allowing you to invest again at the prices prior to the +13.7% gain. In other words, you experience a permanent loss of returns you could (should) have had.
What should we do now?
We don’t know for sure that stock returns will be positive over the next year, whether we’re at all-time highs or not. Every year and every 12-month period has about a 25% chance of being down. Thankfully, we’re not investing for the following year. We have long-term horizons, and for many of us, multi-generational horizons. Losses over these periods are extremely rare.
If you’re actively spending from your portfolio regularly, you most likely have a few years of that spending in a short-term bond fund. If we do experience a significant setback (and eventually we will), then spending will come from selling bond fund shares, not stocks. If you’re still saving, keep investing with the consolation that you’re investing new money at temporarily lower prices. Even though we can’t predict the future, we’ve got a plan to deal with it. A plan that allows us to keep the long-term returns compounding.
If you need funds for sensible reasons, now is as good a time as any to take them. If you don’t, then there’s nothing you need to do differently.
Just let the good times roll.
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Source of data: DFA Returns Web, Portfolio Visualizer
US Stock Asset Class Portfolio = 30% DFA US Large Company (S&P 500) Fund, 30% DFA US Large Value Fund, 40% DFA US Small Value Fund, rebalanced quarterly.
Global Stock Asset Class Portfolio = 21% DFA US Large Company (S&P 500) Fund, 21% DFA US Large Value Fund, 28% DFA US Small Value Fund, 18% DFA International Value Fund, 12% DFA International Small Value Fund, rebalanced quarterly.
Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or additional expenses except where noted. Indexes and mutual funds shown are for illustrative purposes only and may not be the only or any of the funds that Servo clients hold. Servo was not managing client portfolios over the entirety of the periods shown. This content is informational and should not be considered an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.