With trade issues like tariffs, de-globalization, and a declining U.S. dollar, as well as geopolitical events like the war between Ukraine and Russia, investors and government officials can be forgiven for wanting to seek traditional safe havens such as cash and gold. And, they have lately been rewarded. Money market mutual funds have been yielding 4-5% for several years. Gold is at historic highs, having now reached $4,000 per ounce. If history has taught us anything, however, it is that short-term gains don’t necessarily translate into long-term gains.
Short-Term vs. Long-Term Results
Figure 1 is courtesy of Hartford Funds and shows the growth of $10,000 invested in 1978 in five different asset classes: U.S. large cap stocks (S&P 500 Index), U.S. investment-grade bonds (Bloomberg U.S. Aggregate Bonds Index), a balanced portfolio of 50% stocks/50% bonds, gold (the S&P GSCI Gold Index), and 30-day T-bills (SBBI US 30 Day T-Bill Index). Gold and T-bills (cash) are the two worst-performing asset classes.
The Drawbacks of Gold
Brown Financial has long recognized that gold has two significant drawbacks that make it a less-than-ideal asset class for long-term investing. First, gold is unproductive as it does not generate cash flows such as dividends and interest payments (like stocks and bonds do). Income helps provide a steadier path to long-term total returns. Second, investors often assume that gold prices are stable, but prices are determined mainly by speculation on where prices are headed and thus tend to be volatile. According to Dimensional Fund Advisors¹, from 1970 through May 2025, gold has been positive in just 60% of calendar years, while the S&P 500 Index has been positive in 80%.
Regarding higher cash yields, they typically don’t last for very long, particularly when the Federal Reserve begins a rate-easing cycle. According to Hartford², since 1973, there were eight instances when cash yields dropped by at least 4% over periods ranging from three months to two years; the average decrease was 5.06%. Also, bond fund yields are now higher than cash yields.
The Power of a Balanced, Diversified Portfolio
No matter what happens to gold prices or cash yields, a diversified portfolio will continue to power your financial plan. While assets like cash and gold may perform well in certain conditions, they are only one part of a broader investment strategy.
If you’d like to learn more about our common-sense approach to investing or how you can put spare cash to work for you, please contact us.
Figure 1: Long-Term Returns for Different Asset Classes – Growth of $10,000 (1978-2024)
Sources:
¹2025.06.05 DFA Above the Fray – Is Gold a Safe Haven?
²2025.06.24 Hartford Funds Client Conversations – Your Juicy Cash Yield Could Disappear Quickly
Given the volatility of U.S. stocks since the beginning of 2025, it is worth noting the diversification benefits of the fixed income portion of our portfolios, which comprises almost 40% of a 37/63 BFA portfolio. For example, on a total return basis (coupons plus price), our recommended intermediate-term U.S. bond fund has gained 4.6% through the first half of 2025.
Bond prices can lose value over short time frames. Bond prices move in the opposite direction of interest rates, so a shift upward in interest rates, such as from the Federal Reserve tightening, can mean a drop in bond prices. However, higher interest rates also mean higher coupons for newer bonds, which bond funds will purchase as the older bonds roll off their books. Bond coupons have historically made up the largest part of bond total returns, so a bond fund’s total return can still be positive even if bond prices have dipped.
Figure 1, courtesy of PIMCO¹, shows the starting yield (or the average yield to maturity) for various types of bond indices as of December 31, 2021 (before the Fed began aggressively raising short-term interest rates) and as of December 31, 2024. While current starting yields are slightly lower since the end of 2024, they remain near decade highs across most fixed income sectors, with yields of investment-grade core U.S. bonds nearly twice as high as the average yield going back to 2010. Higher returns have historically followed higher starting yields, so the outlook is appealing for a variety of bonds, with BFA clients standing to benefit from attractive return potential in fixed-income investments going forward.
Figure 1: Fixed income sector yields (12/31/2021 versus 12/31/2024) –Yields across most fixed income sectors are high vs. recent history
Disclosures: ¹As of 31 December 2024. SOURCE: Bloomberg, PIMCO. Index proxies for asset classes displayed are as follows: Agency MBS: Bloomberg MBS Fixed Rate Index, Munis: Bloomberg Municipal Bond Index, HY Munis: Bloomberg HY Muni Bond Index, Core: Bloomberg U.S. Aggregate Index, HY Credit: Bloomberg U.S. Corporate High Yield Index, EM: JPMorgan EMBI Global, IG Credit: Bloomberg US Credit Index; Private Credit: Market estimates for yield.
* Securitized Credit computed as average of CLOs, CMBS, and ABS from JPMorgan and Bloomberg. ** Municipal yields are the taxable equivalent yield, adjusted by the highest marginal tax rate (40.8%). Unadjusted IG Muni index yield is 3.7% with a change of 264bps compared to 12/31/2021 levels, the unadjusted HY Muni Index yield is 5.3% with a change of 254bps compared to 12/31/2021 levels.
¹ The yield to worst is the yield resulting from the most adverse set of circumstances from the investor’s point of view; the lowest of all possible yields.
As cybercriminals and technology become increasingly sophisticated in attacking and accessing sensitive information, it’s crucial to stay diligent in protecting yourself, your family, and your business from potential threats. Watch the full video to hear Scott explain how cyberattacks have evolved and what you can do to defend yourself:
Don’t Be Fooled — Much of Your Information is (Likely) Online
Over the past decade, numerous cyberattacks have compromised billions of personal records containing sensitive information, including Social Security numbers (SSNs), bank account logins, driver’s licenses, and more. With prominent corporations such as Yahoo!, Equifax, and National Public Data experiencing breaches, it’s likely at least some of your personal information has already been affected or is currently available for sale on the Dark Web. In an increasingly vulnerable environment, it’s important to take a proactive approach to hack-proof your information and finances.
What Are Common Cybersecurity Threats?
There are several strategies cybercriminals use to access your and your family’s personal information. Many of these crimes place the responsibility on the victim to repair the hack, which may involve significant time, money, and energy:
Credit Card Fraud: Criminals steal your physical credit card or account information to make purchases or access additional data.
SSN Theft: Hackers use an SSN to open a line of credit or loan, placing the responsibility of repayment on the victim.
Medical Identity Theft: Criminals get medical care or prescription drugs in your name, potentially affecting insurance premiums or your ability to get coverage.
Tax Identity Theft: Hackers may access your tax information to obtain your tax refund and other sensitive information.
Account Takeover: Criminals obtain your password for an email or bank account to transfer your funds or secure additional information.
Ransomware: Hackers may access an account or network through a weak point or a vulnerable person to lock a device and threaten to delete or share its contents unless a ransom is paid.
Deepfake Technology: Criminals use audio or visual deepfake technology to impersonate someone, typically a family member or other trusted contact, to deceive a victim into turning over personal data or money.
How Can I Protect Myself from Cybersecurity Risks?
We encourage you to use this checklist to help ensure your online information is safer:
Freeze Your Credit: Visit each of the three major credit bureaus to freeze your credit while you don’t need access, so hackers cannot apply for credit in your name. You have the flexibility to unfreeze at any time before a large purchase or when necessary.
Use a Password Manager: These tools help generate and securely store strong passwords, making it more difficult for a hacker to guess your password and eliminating the need to remember complex passwords.
Secure Your WiFi: Be sure to change the default password for your home or business’s WiFi, ensure encryption is correct, and update your passwords at least every 90 days.
Add Multi-Factor Authentication: A two-step verification process on financial accounts adds an extra layer of protection to your bank information, funds, and investments.
Avoid Clicking Suspicious Links: Rather than clicking links in a text or email, visit the company’s or bank’s official website or contact them to ensure links and requests are legitimate.
Use a Unique Email for Financial Information: Keeping a separate email account for your financial data, distinct from your personal email, can help you better identify spam and fraudulent requests.
Avoid Oversharing on Social Media: Take extra precautions when posting about your whereabouts, children, or other sensitive information online, as this can provide hackers with valuable insights into how to breach your data.
Safeguarding your finances and personal information through proactive action is an essential step in protecting yourself, your family, and your business from cyberattacks. For example, our True Life Planning Cycle helps our clients maintain a comprehensive view of their finances. By addressing various facets of your financial life, the process may help identify potential issues while providing complete solutions to support keeping your money and goals on track. Please contact us for additional strategies to protect your data or for guidance on the next steps to take following a breach.
The global markets are continually evolving, and our investment strategy remains focused on thoughtful, intentional decisions that balance risk and opportunity. After reviewing global market conditions, we are shifting our emerging market investment away from China and toward India’s growing economy. The following three factors particularly stand out as to why.
China’s Economic Challenges
China’s ongoing economic troubles include its struggling real estate sector, high debt, low consumer confidence, and decreasing foreign investment. At the same time, local governments are financially strained, leading to wage cuts and service reductions, which only adds to the country’s instability. On top of that, China’s lack of transparent financial reporting makes it difficult to evaluate the market with confidence, limiting investment potential. Adding to these concerns, the country’s population is aging faster than other major economies, creating long-term demographic challenges.
India’s Economic Rise
As China’s economic growth slows, India is emerging as a compelling alternative for investment. Many experts expect India to take the lead in emerging markets, driven by its younger workforce, rapidly growing middle class, and a strong focus on technological innovation. India is also deepening its ties with the West, further strengthening its position ahead of China. Global market trends reflect this shift, reinforcing our decision to reallocate investments toward India’s rising economy.
China’s Geopolitical Concerns
Beyond economic stagnation, China’s geopolitical position is adding another layer of uncertainty. Rising cybersecurity threats, global trade tensions, and close ties with Russia and North Korea present significant risks for investors. These concerns aren’t just theoretical but are driving real action, with several U.S. states, including Texas, Florida, and Indiana, choosing to remove public pension funds from Chinese investments.
The next four years could bring increasing tensions between the U.S. and China, potentially impacting the market and stability. With these risks in mind, we believe moving investments away from China is a strategic move to help protect portfolios from increasing instability and uncertainty.
At Brown Financial Advisory, our team is committed to adapting strategies so investments remain well-positioned for growth and confidence. Moving away from China is a significant change in the portfolio but it is part of our long-term and calculated approach to managing emerging markets. For an in-depth explanation of why we are shifting our strategy, please watch the video below.
Our team guides your investments with trust and care by following a common sense approach to investing. Now is the right time for this change, and we are optimistic about what opportunities are ahead. Please get in touch with us if you have any questions. We’re here to support you.
Audio Transcript: 00:00:00 – 00:20:18
Scott McLeod
Hi, this is Scott McLeod with Brown Financial Advisory. Thank you for taking just a few minutes to allow us to discuss with you what’s happening in the portfolio right now. And specifically with emerging market stocks. We have some concerns with regards to China and some of the things that are happening in our geopolitical environment, but also in their economic headwinds.
00:20:23 – 00:44:06
Scott McLeod
We’d like to share with you that we plan to get the portfolio away from China, and there are some significant changes, but we wanted to share with you the reasons for those changes before we make them in the portfolio. Of course, I’m Scott MacLeod, but I’m also joined today by Josh Lancaster. Josh is our chief investment officer and has been working in the industry for over 25 years.
00:44:09 – 01:04:04
Scott McLeod
He’s going to share some of the specifics with regards to what’s happening in China and how it impacts our portfolio, and why we feel it’s important for us to make these changes. First, there are some disclosures, and then I’ll share a big picture view of what’s happening. First of all, we’d like to recommend that we move the portfolio away from China.
01:04:06 – 01:33:20
Scott McLeod
This means selling our emerging market positions and reinvesting in something that is an ex China position. And the reason for that basically falls in three categories. Number one, we feel like there are economic headwinds in China that really can’t be overcome in the short term. They have demographic issues where their workforce is aging and the lack of transparency and some other things in their accounting methods that we really feel like are going to handicap China going into the next decade and maybe even beyond that.
01:33:22 – 01:54:16
Scott McLeod
The second thing is, is that we really feel like that India is the next super star in the emerging market space. The more money we have invested in China, the less we can invest in India, and we would rather focus our energies on that in an economic environment because they, frankly, are friends with the United States and also growing at a really rapid rate.
01:54:16 – 02:21:05
Scott McLeod
We feel like that their technology focuses, and some of the things that are happening in India will really bode well for the portfolio. And finally, we think there are serious concerns with the geopolitical environment and what’s happening with China and the United States. The Trump administration has not been friendly to China in the past, and it appears that the Chinese government has been using, international hackers for purposes of espionage and also to undermine our infrastructure.
02:21:12 – 02:49:03
Scott McLeod
And they also have a very strong relationship with Russia and South Korea, both of whom have sworn, against the United States. So there are some very serious concerns in our emerging market space surrounding China, and we’ve decided to make this move in the portfolio as a result of those concerns. But I will let Josh right now share a few more specifics with regards to the portfolio, and he’ll tell you exactly what we’re thinking with regards to the Chinese market.
02:49:06 – 03:16:17
Josh Lancaster
Thanks, Scott. The first issue we want to talk about is China’s economic troubles. As you may know from the headlines, bullet one points out China’s real estate bubble and crushing debt. China has been trying over the years to boost its economic standing among the world’s biggest economies. But money supply growth is cratering. Purchasing indices are slowing. Foreign investment has just about stopped.
03:16:19 – 03:48:27
Josh Lancaster
And consumer confidence is terrible. The government has tried various stimulus packages over the years, but to minimal effect, the government could alleviate its housing crisis. There’s too much supply by issuing bonds and purchasing the oversupply, but that would exacerbate its already high debt levels. Book two talks about, many Chinese local governments are cash strapped. So basically, these local governments are having to cut services and wages.
03:49:09 – 04:19:09
Josh Lancaster
Especially in, such critical areas as health and infrastructure. This has been leading, to many protests, actually, across the country. And one example is a protest in last October by, dozens of medical staff in the city of Shen Way, on China’s southeastern coast. Medical staff actually took over, the whole of the public hospital there to demand wages and bonuses that have not been paid.
04:19:12 – 04:41:04
Josh Lancaster
And when you look at vol three, this is an issue that we have been dealing with for a very long time. That is the lack of transparency and the interference by the Chinese central government. With many economic stats like gross domestic product or GDP. This makes it difficult to trust the metrics that the markets use in their valuations.
04:41:06 – 05:09:28
Josh Lancaster
And this also means that China will not be awarded developed market status until its markets and accounting systems become more transparent. Next issue we want to talk about is China’s demographic troubles. China’s population is aging faster than other major economies. The graph on the left of the page here, it shows the projected increase in people over 60, with China definitely leading the way on that.
05:10:00 – 05:44:01
Josh Lancaster
While the chart on the right shows it, China has now dipped into negative population growth or more deaths than births. The negative population growth is mainly from its one child policy from 1980 through 2015, which the government has had a hard time overcoming, even with incentives for families to grow. You now have more retirees then you have new workers, which of course leads to bullet to pension coffers are running low and less goods and services are being produced.
05:44:03 – 06:07:22
Josh Lancaster
Next issue we want to discuss concerns, the emerging market space and who really is the poster child or leader in that space. In bullet one, we say that India is actually expected to replace China as that leader in emerging markets. In the graph on the right actually shows the percentage for China and India of the MSCI Emerging Markets Index.
06:07:24 – 06:33:20
Josh Lancaster
And as you can see in that graph, China’s weight has been coming down since 2020 while India’s weight is on the way up. So why is this? Well, we talked about that in bullet point two, which says that India has a younger demographic, a growing middle class, a focus on technological innovation and a link to the West. Well, contrast this with China’s aging demographic.
06:33:22 – 07:03:26
Josh Lancaster
A property slump and protectionism from the West. The graph on the left shows this bifurcation in outlook for these two countries. The graph shows where their global economies are facing long term headwinds or tailwinds. Long term tailwinds and headwinds are based on factors such as debt demographics and innovation. Near-term tailwinds and headwinds are based on things like labor, housing, spending, investment, and financial stability.
07:03:28 – 07:38:07
Josh Lancaster
As you can tell from the graph, India in the upper right quadrant is benefiting from both long term and near-term tailwinds, while China in the lower left quadrant is facing all headwinds. And in bullet point three, we talk about how there are some U.S. states that have instructed their public pension plans to remove Chinese investments. Those states currently are Indiana, Florida, Missouri, Oklahoma, Kansas and Texas.
07:38:10 – 08:15:04
Josh Lancaster
Look at the issue we want to discuss is how China is a threat to the United States. And I am grateful for the Wall Street Journal’s coverage of these issues in bullet one. We note that the Chinese government is involved in espionage against Western governments, companies, and citizens. In fact, we found out in 2023 and 2024 that hackers working for Chinese intelligence have been able to do things such as gain the ability to shut down dozens of U.S. ports and power grids, and also access cell phone lines used by US government.
08:15:05 – 08:39:27
Josh Lancaster
Senior national security and policy officials inability three. We know that Chinese ships have been accused of cutting undersea cables to disrupt data communications. And finally, China has close military relationships to North Korea in Russia’s war with Ukraine. Both Russia and North Korea are avowed enemies of the United States.
08:39:29 – 08:58:27
Scott McLeod
Thanks, Josh. So to summarize, there are three bullet points again that we’d like to emphasize. Number one, we’re concerned about the Chinese market and its ability to grow from here. Their demographics are terrible. Their lack of transparency is awful in the global view. So we really don’t think the potential in China is that great over the next 5 to 10 years.
08:59:04 – 09:18:15
Scott McLeod
Second, we think that the Chinese market, because they are at this point of economic stagnation, is not the right emerging market to be involved in. We’d like to focus our energies elsewhere. They’re not the superstar that they’ve been for the last 20 years, and we think there’s an emerging superstar in India and we would rather focus our attention there.
09:18:18 – 09:37:02
Scott McLeod
And then finally, we are a little bit concerned about China and their threat to the sovereignty of the United States. They’re hackers. The aggressive nature that the Chinese government has shown recently. We’re concerned that the next four years for the Trump administer nation may be a challenge, and it will probably be reflected in the Chinese market as well.
09:37:06 – 09:45:05
Scott McLeod
So we would rather dial away from that and potentially find opportunities in other parts of the portfolio.
09:45:08 – 09:59:14
Scott McLeod
Thank you for the opportunity to share these thoughts with you. Please let us know if you have any questions. We’re happy to hear from you. This is a big change in the portfolio, but we think it’s good timing for this change. We look forward to seeing what happens in the opportunities to come. Thank you again.
Last year was excellent for the U.S. market, with stocks up 25% after increasing 26% in 2023. It was an outstanding performance compared to international stocks that struggled during the year due to the rising dollar. The 2024 market was largely driven by major technology companies, including Amazon, Facebook, Tesla, and Google, together known as the “Magnificent Seven.” However, while stocks soared, bonds struggled amid rising interest rates. As we look ahead to 2025, the U.S. financial market offers a mix of optimism and cautious planning.
Economic Outlook for 2025
This year, the U.S. economy remains uncertain. The Federal Open Market (FOMC) predicts the GDP will slow from 2.5% to 2.1%, with inflation expected to decline as well. Plus, policy changes under the Trump administration may add another layer of uncertainty for the U.S. economy, such as the potential growth of federal debt. By understanding key market trends and taking proactive steps, Brown Financial Advisory can help better position portfolios for growth as we navigate potential uncertainty in 2025.
Portfolio Positioning
Bonds are Back: After years of low returns, bonds now offer some of the most compelling opportunities than they have in several years. With significantly higher yields, bonds can be a foundation for stability and growth. If interest rates go down, they could yield significant returns, and even if interest rates rise, bonds still won’t lose much value.
Small Companies Offer Big Potential: While smaller companies, or “small-caps,” have faced challenges in the past few years, 2025 could be their time to shine. Earnings for small-caps are projected to grow by 44% this year due to improving economic conditions.
Diversification Matters: This year, large U.S. companies, or “large-caps,” including the “Magnificent Seven,” will continue to drive much of the U.S. market’s growth. In fact, in 2024, these companies accounted for 55% of the S&P 500’s annual return, collectively delivering a remarkable 48% return for the year. Without their contribution, the S&P 500 would have gained only 10%. However, these stocks are expensive, with little room for growth. Diversifying your portfolio and investing into small companies (“small-caps”), international stocks, and bonds can balance it and reduce risk.
We see a favorable outlook for portfolios looking ahead to our Brown Financial Advisory 5-10 Year Asset Class and Model Return. While the economy is expected to grow, inflation and interest rates remain uncertain. At Brown Financial Advisory, we can help you navigate potential volatility and uncertainty. For a deeper breakdown of our economic outlook, watch the video below.
We remain optimistic about the 2025 economy and want to help you be proactive in your financial planning. Learn more about our Investment Management Philosophy and common sense approach to maximizing your portfolio. If you have any questions, please contact us. We’d love to hear from you.
Time For Cooler Weather, Falling Leaves, And—Capital Gains Distributions?
We are familiar with the adage, “Nothing is certain in life except death and taxes.” Your BFA investment committee understands that it is not what you save; it is what you keep. We have a system to minimize taxes in our client portfolios when possible. Our process includes reviewing tax efficiency when selecting our recommended investments, using asset location rules in portfolios, and assessing/minimizing our clients’ exposure to year-end capital gains distributions. (Mutual funds are required to distribute their realized capital gains by year-end.)
While it is important to never “let the tax tail wag the dog,” we consider an investment’s tax efficiency when we do our due diligence on our recommended securities. We review such statistics as the turnover ratio (the percentage of fund assets replaced in one year) and the tax cost ratio (how much taxes have consumed those percentages of investors’ assets over a trailing time period). We also consider the type of investment. For example, exchange-traded funds (ETFs), particularly those that index, are known for their tax-efficient structure, including not paying year-end capital gains distributions. Unfortunately, sometimes no suitable ETFs are available for our use in an asset class.
Asset location, or the decision of which securities should be placed in tax-deferred accounts and which in taxable accounts to maximize after-tax returns, is a crucial part of our strategy. For example, bonds and other fixed-income investments, which generate most of their returns in ordinary income, should be held in tax-deferred accounts.Now that fall has arrived, our focus turns to year-end capital gains distributions from mutual funds. Research from Russell Investments (see Figure 1) has shown market performance has no relationship to capital gains distributions, which can be short- and long-term. In fact, material (i.e., 5% or more of net asset value) capital gains distributions can happen in years when the stock market is down, which last occurred in 2022.
We review estimates of capital gains distributions as they become available and determine which are material. If it is a recommended fund, we can hold off on buying it until after the distribution. We can also sell those positions where it makes sense to recognize the built-up capital gains rather than take the distribution. Finally, we can do tax-loss harvesting, where we identify positions in taxable accounts that have a capital loss and swap out of those positions for 30 days. Capital losses offset capital gains and $3,000 of ordinary income in the current year and can be carried forward indefinitely for federal tax purposes.
While taxes may be inevitable, proactive planning and management can help make a significant difference. We stay committed to protecting your portfolio’s growth and helping to minimize undue tax liabilities year-round. Through thoughtful asset location, our selection process, and continually monitoring tax implications, we aim to help you navigate year-end capital gains distributions efficiently.
Explore how we address timely tax considerations using our ongoing True Planning Cycle. Please contact us anytime if you’d like to discuss your situation and needs more in-depth.
Do Presidential Elections Affect The Markets Over The Long Term?
In a U.S. presidential election year like 2024, headlines regarding who is leading in the polls or how a candidate fared in the latest debate tend to dominate the news cycle. Investors often equate controversy with swings in the investment markets, particularly during the primaries. Still, history indicates markets continue to grow over the long term regardless of who sits in the Oval Office. Figures 1 and 2 are courtesy of Capital Group. Figure 1 shows the 10-year growth of a hypothetical $10,000 invested in the S&P 500 at the start of each election year since 1936, with blue bars representing a Democrat winning the presidency and red bars showing a Republican as the victor at the beginning of the 10 years. Except for the 2000s, which saw the dot-com bust and global financial crisis, every 10-year period has seen growth in the S&P 500. And while growth has been somewhat higher under a Democratic president, it has averaged over 10% regardless of the president’s political affiliation.
Finally, while we use broader-market proxies for our U.S. investing and do not focus on sectors of the U.S. economy, it is interesting to see what industries would benefit if there were a blue or red wave (i.e., one party taking over the presidency as well as both houses of Congress). A Republican sweep, or red wave, could benefit banks, healthcare providers, and oil and gas companies, primarily through deregulation. A Democratic sweep, or blue wave, could boost renewable energy initiatives, industrial stimulus spending, and telecommunications projects through additional funding for nationwide broadband access.
At Brown Financial, our investment philosophy centers on time-tested strategies that prioritize consistency rather than reacting to external influences or shifts. By continuously monitoring the markets and your portfolio, we can identify opportunities when they arise and make thoughtful adjustments to enhance returns, even during periods of uncertainty. Learn more about how our common-sense approach to investing may be able to help you achieve long-term financial outcomes.
In last quarter’s commentary, we discussed how challenging it is to forecast which country’s stock market will outperform by looking at past returns but noted our client portfolios are allocated across the globe in bonds and stocks to potentially capture higher returns where they appear. Not only does the sheer number of overseas stocks broaden the investing landscape for our clients but they also offer the opportunity for factor investing, or focusing on those types of companies history has shown are persistent drivers of returns, such as Smaller Companies and Value. (Value stocks are shares of a company that appears to trade at a lower price relative to its fundamentals.)
The international funds in our client portfolios have benefited from these international factor exposures. Given the recent headline-grabbing performance of Large-Capitalization Growth stocks in the technology sector, investors can often overlook the strides Value and Small-Capitalization stocks have made during the past three years. Figures 1 and 2 are courtesy of Dimensional Fund Advisors, pioneers in factor investing, and show by region the one- and three-year performance differences of Value minus Growth stocks and Small-Capitalization minus Large-Capitalization stocks. Factor investing, particularly Value, was successful in overseas stocks during both time frames. Additionally, emerging market stocks had the largest margins of outperformance.
The benefits of global diversification and factor investing may offer a valuable opportunity to help enhance your investment strategy.
Figure 1
Figure 2
At Brown Financial, our approach emphasizes the importance of global allocation and factor-based strategies that have demonstrated resilience to help our clients pursue long-term financial success. Learn more about our investment philosophy and how it may be able to benefit your portfolio.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses and returns current to the most recent month-end are available from Dimensional at (512) 306-7400 or by visiting www.dimensional.com.
Selection of funds, indices and time periods presented chosen by advisor. Fama/French indices used for Value vs Growth are: US Large Value, US Growth, Intl Value, Intl Growth, EM Value, and EM Growth. Indices used for Small vs Large are: Dimensional US Small Cap, S&P 500, Dimensional Intl Small Cap, MSCI World ex USA Growth, Dimensional EM Small, and MSCI EM.
Performance for periods greater than one year are annualized unless specified otherwise. Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Average annual total returns include reinvestment of dividends and capital gains. Mutual funds distributed by DFA Securities LLC.
Given the yo-yo returns we have seen over the past couple of years (U.S. large-cap stocks -18% in 2022/+26% in 2023, foreign developed stocks -14% in 2022/+19% in 2023, U.S. core bonds -13% in 2022/+6% in 2023, etc.), our clients can be forgiven for any resulting dizziness. History shows, however, that global investment returns can change dramatically from year to year, especially in the equity markets and by country. As our friends at Dimensional Fund Advisors (DFA) point out, “Investment opportunities exist all around the globe, but the randomness of global stock returns makes it exceedingly difficult to figure out which markets are likely to be outperformers.” Put another way, it is very challenging to forecast which country’s stock market will outperform by looking at past returns. Exhibit 1 from DFA shows the performance of 22 developed markets since 2003. (Each color represents a different country, and each column is sorted top down, from the highest-performing country to the lowest.) As you can see, over the past 20 years there has been no consistent “leader.” New Zealand posted the highest developed markets return in 2019—but the lowest in 2021. The U.S. ranked in the top five for annualized returns over the entire 20 years but finished first in the country rankings just once over that period. In nine calendar years, it was in the lower half of performers. The good news is our clients don’t have to worry about which countries will deliver the best returns in the future. Our client portfolios are allocated across the globe in bonds and stocks to potentially capture higher returns where they appear. Outperformance in one market can help offset lower returns elsewhere, helping to provide more reliable outcomes over time.
We are sometimes asked after a market downturn, “Is this time different?” While the answer historically has always been “No,” it certainly feels like a “Yes” this time, given the struggles in the stock and bond markets ever since the Federal Reserve started raising the federal funds rate in March 2022. Year-to-date through early October 2023, U.S. stocks (S&P 500) are up over 14% but are not back to their recent high. U.S. core bonds are down over 2% and have never had a third straight year of losses. Why is this? Figure 1 shows only one calendar year going back to 1977 when both U.S. stocks and bonds declined, and that was 2022. BFA clients are not alone in struggling to shake off that year, as every investor with stocks and bonds in their portfolios (the vast majority) is in the same situation.
The good news is that brighter days should be ahead, which could benefit BFA clients. For example, Figure 2 shows our recommended Core Plus bond fund is set up to possibly earn over 13% if the federal funds rate drops by 1%. Most analysts and even the Federal Reserve are forecasting rate decreases this year.
Finally, many investors are tempted to view Treasury bills, CDs, and money market mutual funds as bond replacements, given the higher yields they are currently paying. However, as rates come down, those short-term yields will decrease, and stocks, bonds, and a balanced portfolio should rebound over the next one- and five-year periods. (See Figure 3)
