Investing is a long term commitment. It is full of uncertainty and unknowns.
If you are 50-60, you should be planning for a 30+ year time horizon.
When we develop an investment plan for a client, we base it on academic data and concepts, not on short-term market guesses, or “forecasts.”
We also understand the correlation between risk and reward. If you own a riskier asset, you expect to be compensated with greater expected returns over the long term.
Just as if you were a bank lending money, you would demand a greater interest rate on a loan to a small, new company than you would from a well established, profitable Fortune 500 company.
Emerging markets is one of the riskier asset classes and can be quite volatile. So why do we recommend owning it, as part of a globally diversified portfolio? Because of it’s greater expected return. Emerging Markets funds invest in companies in lesser developed countries, mostly in Asia, Africa and Latin America.
In past years, the emerging market asset class has not done well. We have not reacted to this underperformance by selling this asset class. Just the opposite. We have maintained our positions in emerging market funds, as we know that over the long term, the expected outperformance should appear.
We don’t know when the rewards for owning emerging market funds will occur. It could be this year or many years from now, but we are confident that this exposure is worthwhile and will be to your benefit.
In 2015, this asset class trailed nearly all other asset classes, except for commodities, which we generally do not invest in. However, for 2016, emerging markets have been by far the best performing asset class.
Let’s compare the past 15 years and you will understand the potential benefits. Over the past 15 years, the S&P 500, which is composed of US based large companies, has averaged 5.60% per year. However, the DFA Emerging Markets Value Fund (DFEVX) has an annualized return of 12.1% per year over the same 15 year period. That is an outperformance of 6.5% per year, over the past 15 years.
Without an advisor to guide you and help you maintain this exposure, you may have sold off your emerging market fund already, as you may have been disappointed by its recent underperformance as compared to other asset classes.
Investing and your financial future are not about the next year. To reach your financial goals, you need excellent planning, discipline and research to make sure that you are doing the right thing for decades to come.
Our firm can provide value to you in many ways. You may not always see our value appear in every monthly or quarterly statement. But our value will definitely appear over time in your statements, as well as in the advice we provide in conversations and when you have questions or concerns.
And sometimes the value we provide will come when you don’t expect it, or when the market reacts in ways that you least expect. And that’s when we will be here for you.