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Mirror Images

Mirror Images

January 16, 2018

Asset class returns are mostly random from year to year.  So the chart below, which illustrates the order of asset class returns (as represented by the DFA funds) every year since 2006, always looks like a patchwork quilt.  Asset classes that are at the top for a while usually float down to the bottom eventually, and vice versa.

But no two years in recent history have been so dramatic as 2016 and 2017 were.  Besides five-year bonds (DFA Five-Year Global Fixed Income Portfolio), the relative order of stock asset class returns in 2016 and 2017 were the exact opposite.  US small value was on top in 2016, and on the bottom in 2017.  International small value was on the bottom in 2016 but on the top in 2017.  The S&P 500 (DFA US Large Company Portfolio) was in the middle in 2016 and 2017.

Beyond just recent reflections, there are a few core takeaways....  

First, I think this table is one of the best visual representations of why trying to time the market is a bad idea.  Do you see any exploitable patterns?  I don't.  

Next, rebalancing your portfolio -- periodically selling some of what's performed well to buy more of what's performed poorly -- helps to keep your money closely aligned with its original design, but also allows you one of the few dependable ways to "buy low(er)" and "sell high(er)".  It's hard to buy more of what's struggling and to sell some of what's working, but clearly, it pays off.

Also, let's step back and appreciate how well you can diversify your wealth with just a handful of core holdings.  In most years, at least one asset class lost money, but in no year did every asset class decline.  The difference each year between the best and worst performing asset class was never less than 10%, and once (in 2008) over 50%!  Even identical asset classes in different regions, such as small-cap value (US and international) perform remarkably different from year to year; each one has been at either the top or bottom of the stock charts for the last three years.

Finally, you can see why a portfolio that holds different asset classes in different regions is never going to track the S&P 500 (see DFA US Large Company Portfolio) or US market very closely.  In 2016, international large and small value stocks noticeably underperformed the S&P 500, but they outperformed by the same amount this year.  US large and small value dramatically outperformed last year but underperformed in 2017.  And, of course, high quality, short-term bonds (DFA Five-Year Global Fixed Income) usually act as a drag on returns for balanced asset allocations except in years like 2008 or 2011 when stocks are in a bear market.  So comparing your diversified portfolio performance to the S&P 500 is a waste of time.

Ultimately, not every period will look like the mirror image of 2016 and 2017.  But broad and efficient diversification coupled with a disciplined approach is going to be the winning strategy to achieve your long-term financial goals regardless.


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 other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.