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2020-01-16

The Global Risks Report 2020 – This Is What The World Is Worried By

For the first time the Global Risks Report is dominated by the environment.

From World Economic Forum (weforum.org): Following a year of floods and droughts, when fires ravaged Australia and the Amazon, and teenage climate activist Greta Thunberg was chosen as Time’s Person of the Year, it is perhaps little wonder that environmental issues dominate leaders’ concerns for the future.

But the latest edition of the World Economic Forum’s Global Risks Report shows how loudly they are sounding the alarm. Established leaders and up-and-comers agree: climate change is the stand-out long-term risk the world faces.

The report, which identifies the top threats facing our world by likelihood and extent of impact, names failure to mitigate and adapt to climate change as the key concern for the Forum’s network of business leaders, NGOs, academics and others. The group places it as the number one risk by impact and number two by likelihood over the next 10 years.

Image: World Economic Forum Global Risks Report 2020.

In fact, respondents to the Global Risks Perception Survey, which underpins the report, rank issues related to global warming – such as extreme weather and biodiversity loss – as the top five risks in terms of likelihood over the coming decade. This is the first time one category has occupied all of the top slots since the report was launched in 2006.

Image: World Economic Forum Global Risks Perception Survey

Climate change is hitting harder and accelerating faster than many people predicted. And efforts to meet commitments to limit global warming are slipping, with countries veering off course. For the Global Shapers Community – the Forum’s younger constituents – environmental issues are even more pressing and top their list of concerns both in the short and long term.

Image: World Economic Forum Global Risks Perception Survey

Doing Well by Doing Good

As citizens, individuals can initiate positive change by expressing their political preferences around sustainability through the ballot box. As investors, they can express their preferences through participation in global capital markets. Indeed, a strong case can be made that the latter can have a larger and more immediate impact. And it certainly doesn’t mean having to compromise returns.

Investors can evaluate those companies being considered for investment using a focused set of environmental issues that reflect their primary concerns. For example, if one is trying to reduce a portfolio’s greenhouse gas emissions and potential emissions from fossil fuel reserves, the worst offenders across all industries may first be deemphasized or excluded from the portfolio altogether. An across-industry comparison of this nature provides an efficient way to significantly reduce the aggregate greenhouse gas emissions per unit of revenue produced by companies within a portfolio with a minimal reduction in diversification.

Then, companies may also be rated on sustainability considerations. For example, this could include retail companies that improve the energy efficiency of their facilities, utilities that produce electricity using solar or wind power, trucking companies that improve the fuel efficiency of their fleets or use alternative-fuel vehicles, or energy companies that increase efficiency, reduce waste, and improve their overall environmental footprint. On the other hand, companies with poor environmental sustainability ratings relative to industry peers may receive a lesser weight or may be excluded.

Investing well and incorporating values around sustainability need not be mutually exclusive. Starting with a robust investment framework, then overlaying the considerations that represent the views of sustainability-minded investors allows for a cost-effective approach that provides investors the ability to pursue their sustainability goals without compromising on sound investment principles or accepting lower expected returns. By aligning our values with investment goals, each of us can make a positive and an immediate difference.

You can read more about our sustainability portfolios here.

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2020-01-07

The 2010s: A Decade in Review

Imagine it is early January 2010 and you are reading a review of the financial markets. Investors have been on a roller coaster over the past three years, living through the stress of the global financial crisis and market downturn of 2008–2009, then experiencing the recovery that began in March 2009 and is still going strong.

Investors who rode out the market’s slide are beginning to be rewarded. But the rebound is 10 months old, and markets have a long way to go to reach their previous highs. Opinions are mixed about what might unfold in the coming year. A December 2009 headline in the Wall Street Journal underscored the uncertainty: “Bull Market Shows Signs of Aging.”¹ The publication pointed out that, although stocks have rallied and indices are on the rise, worries are mounting in some quarters that the market is running out of steam.

From the vantage point of early 2010, you may be wondering whether to stick with your investment plan or move into cash and wait for more evidence that the markets have recovered. Now, fast forward to today and consider what the global equity markets delivered to investors who stayed the course.

On a total return basis, global stocks more than doubled in value from 2010–2019, as Exhibit 1 shows. The MSCI All Country World IMI Index, which includes large and small cap stocks in developed and emerging markets, had a 10-year annualized return of 8.91%. From a growth-of-wealth standpoint, $10,000 invested in the stocks in the index at the beginning of 2010 would have grown to $23,473 by year‑end 2019.

Exhibit 1

Growth of Wealth

MSCI All Country World IMI Index, January 2010–December 2019

Past performance is no guarantee of future results. Source: MSCI. In US dollars, net dividends. MSCI data © MSCI 2020, all rights reserved. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio.

Despite positive annual market returns during most of the decade, investors had to process ever-present uncertainty arising from a host of events, including an unprecedented US credit rating downgrade, sovereign debt problems in Europe, negative interest rates, flattening yield curves, the Brexit vote, the 2016 US presidential election, recessions in Europe and Japan, slowing growth in China, trade wars, and geopolitical turmoil in the Middle East, to name a few.

The decade also brought technological advances in electronic commerce and cloud computing, the global embrace of the smartphone and social media, increased automation and enhanced artificial intelligence, and new products like electric cars and early iterations of self‑driving ones.

Looking back, you could conclude that the decade had its share of uncertainty—just like the decades before. But overall, the US equity market experienced moderate volatility compared with previous decades. Exhibit 2 displays this by looking at returns and standard deviation, where a higher standard deviation reflects wider market swings during that decade.

Exhibit 2

Volatility in Perspective

S&P 500 Index annualized returns grouped by decade (1930–2019).

Past performance is no guarantee of future results. S&P 500 Index data provided by Standard & Poor’s Index Services Group. Standard deviation is a statistical measurement of historical volatility.

Benefits of Diversification

Investors who committed to global diversification and to areas of the market associated with higher returns—small cap stocks and value stocks (i.e., stocks trading at low relative prices)—were challenged over the past decade. As shown in Exhibit 3, during the 2000s, investors were generally rewarded for holding emerging markets stocks and developed ex US stocks. During the 2010s, the US market outperformed developed ex US and emerging markets.

Exhibit 3

The Past Two Decades—2000s vs. 2010s

Annualized returns (%)

Past performance is no guarantee of future results. Market segment (index representation) as follows: US Stocks—Large Cap (Russell 1000 Index), Small Cap (Russell 2000 Index), Growth (Russell 3000 Growth Index), Value (Russell 3000 Value Index); Developed ex US Stocks—Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), Growth (MSCI World ex USA Growth Index); Emerging Markets Stocks—Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), Growth (MSCI Emerging Markets Growth Index). Index returns are in US dollars, net of withholding tax on dividends. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.

The performance of value stocks vs. growth stocks (i.e., stocks trading at high relative prices), and small vs. large cap stocks, also varied between decades. Small cap and value stocks outperformed large cap and growth stocks in the 2000s, while the 2010s produced mixed outcomes. Small caps underperformed large capsin the US and emerging markets but outperformed in the developed ex US market. Value underperformed growth in all three market regions. Despite underperforming large cap and growth in the US, small cap and value delivered 11.83% and 11.71%, respectively, for the decade.

Exhibit 4 shows the cumulative investment experience over both decades, with small cap and value stocks outperforming large cap and growth stocks, respectively, across the US, developed ex US, and emerging markets. The annualized 20-year returns illustrate how diversification can help investors ride out the extremes to pursue a positive longer-term outcome.

Exhibit 4

The Longer View

2000–2019: Annualized returns (%)

Past performance is no guarantee of future results. Market segment (index representation) as follows: US Stocks—Large Cap (Russell 1000 Index), Small Cap (Russell 2000 Index), Growth (Russell 3000 Growth Index), nValue (Russell 3000 Value Index); Developed ex US Stocks—Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), Growth (MSCI World ex USA Growth Index); Emerging Markets Stocks—Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), Growth (MSCI Emerging Markets Growth Index). Index returns are in US dollars, net of withholding tax on dividends. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Over the past decade, global fixed income also posted returns that may have surprised some investors. In 2010, investors looking at historically low interest rates may have expected rising rates as financial markets and economies recovered from the crisis. But over the decade, short-term rates increased while long-term rates decreased. Realized term premiums were positive, as long-term bonds generally outperformed shorter-term bonds. Realized credit premiums were also positive, as lower-quality bonds generally outperformed higher‑quality bonds.²

Enduring Principles

That brings us to now—January 2020. Stocks and bonds in the US, and in many other developed markets and emerging markets, logged strong returns last year. The US bull market is 10 years old, and current headlines can give investors other reasons to worry about the future—for example, a pushback on globalization, the effects of climate change, the limits of monetary policy, the fate of Brexit, and the vagaries of the 2020 US presidential race. And those are merely the known unknowns. Looking ahead, who can say what the next 10 years will bring? The only certainty is the decade will have its own set of surprises.

Here’s what we can learn from the past decade (and the ones that came before it): Despite all the change and uncertainty, the fundamentals of successful investing endured. Diversify across markets and asset groups to manage risks and pursue higher expected returns. Stay disciplined and maintain a long-term perspective. Take the daily news with a grain of salt and avoid reactive investment decisions based on fear or anxiety. Don’t try to predict future performance or time the markets. Instead, develop a sensible investment plan based on a strong philosophy—and stick with it.

Investors who follow these principles can have a better financial journey in any decade.

2019 in Numbers

Annual Market Summary

2019 index returns

Past performance is no guarantee of future results. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), Developed ex US Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Bloomberg Barclays data provided by Bloomberg. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.

World Stock Market Performance

MSCI All Country World Index with selected headlines from 2019

Past performance is no guarantee of future results. Graph Source: MSCI. In US dollars, net dividends. MSCI data © MSCI 2020, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio.

Equity

As of December 31, 2019

Equity

Past performance is no guarantee of future results.

*Annualized

World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index is used as the proxy for the Developed ex US market. Russell 3000 Index is used as the proxy for the US market. MSCI Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. Market segment (index representation) for US as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). Market segment (index representation) for developed ex US as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth Index). Market segment (index representation) for emerging markets as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. Frank Russell Company is source and owner of trademarks, service marks, and copyrights related to Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Indices are not available for direct investment. mIndex performance does not reflect the expenses associated with the management of an actual portfolio.

Fixed Income

As of December 31, 2019

Fixed Income

Past performance is no guarantee of future results.

*Annualized

Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA–AA Corporates represent the ICE BofA US Corporates, AA–AAA rated. A–BBB Corporates represent the ICE BofA US Corporates, BBB–A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2020 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2020 ICE Data Indices, LLC. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Global Fixed Income

As of December 31, 2019

Global Fixed Income

Footnotes

¹“Bull Market Shows Signs of Aging,” The Wall Street Journal, December 7, 2009.
²Bloomberg Barclays Indices

DISCLOSURES

In USD.

Growth stocks trade at a high price relative to a measure of fundamental value, such as book value or earnings. Value stocks trade at a low price relative to a measure of economic value, such as book value or earnings

UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

CANADA: January 6, 2020. These materials have been prepared by Dimensional Fund Advisors Canada ULC. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns, including changes in share or unit value and reinvestment of all dividends or other distributions, and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

AUSTRALIA: This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This publication is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Any opinions expressed in this material reflect our judgment at the date of publication and are subject to change.

WHERE ISSUED BY DIMENSIONAL IRELAND LIMITED
Issued by Dimensional Ireland Limited (DIL), with registered office 10 Earlsfort Terrace, Dublin 2, D02 T380, Ireland. DIL is regulated by the Central Bank of Ireland (Registration No. C185067).

WHERE ISSUED BY DIMENSIONAL FUND ADVISORS LTD.
Issued by Dimensional Fund Advisors Ltd. (DFAL), 20 Triton Street, Regent’s Place, London, NW1 3BF. Company Number 02569601. DFAL is authorised and regulated by the Financial Conduct Authority (FCA) – Firm Reference No. 150100.

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The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or, representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by the Issuing Entity to be reliable and the Issuing Entity has reasonable grounds to believe that all factual information herein is true as at the date of this document. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmitting of this material is strictly prohibited. The Issuing Entity does not accept responsibility for loss arising from the use of the information contained herein.

The Issuing Entity issues information and materials in English and may also issue information and materials in certain other languages. The recipients continued acceptance of information and materials from the Issuing Entity will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd, Dimensional Ireland Limited, Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

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RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

Diversification neither assures a profit nor guarantees against loss in a declining market.

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2020-01-07

The Market Has No Memory

Dimensional Founder David Booth discusses the lessons from 2019 that investors can apply to 2020.

I have worked in finance for over 50 years, and it seems that every January the same thing happens. Lots of folks look back at last year’s performance to draw conclusions they can use to predict what markets will do in the year to come. I don’t make predictions, but I do think it’s worth answering this question: What are the lessons from 2019 that we can apply to 2020?

Let’s go back to where we were this time last year. The words running across CNBC’s home page were, “US stocks post worst year in a decade as the S&P 500 falls more than 6% in 2018.” The Wall Street Journal summarized the state of market affairs with this headline: “U.S. Indexes Close with Worst Yearly Losses Since 2008.” Amidst gloomy predictions for 2019, I posted a video on the limitations of forecasting.

Things felt ominous. We started the year with a lot of anxious people. Some decided to get out of the market and wait for prices to go down. They thought that after 11 years, the bull market was finally on its way out. They decided to time the market.

We all know what happened. Global equity markets finished the year up more than 25%¹ and fixed income gained more than 8%.²

Missing out on big growth has as much impact on a portfolio as losing that amount. How long does it take to make that kind of loss back? And how is someone who got out supposed to know when to get back in?

The lesson from 2019 is: The market has no memory. Don’t time the market in 2020. Don’t try to figure out when to get in and when to get out—you’d have to be right twice. Instead, figure out how much of your portfolio you’re comfortable investing in equities over the long-term so you can capture the ups and ride out the downs. A trusted professional can help you make this determination, as well as prepare you to stay invested during times of uncertainty.

Not enough “experts” subscribe to this point of view. They’re still trying to predict the future. You’ve probably heard the saying, “The definition of insanity is doing the same thing over and over again and expecting a different result.” I’ve seen people make this same mistake for 50 years.

We’ll never know when the best time to get into the market is because we can’t predict the future. And if you think about it, that makes sense. If the market’s doing its job, prices ought to be set at a level where you experience anxiety. It’s unrealistic to think the market would ever offer an obvious time to “get in.” If it did, there would be no risk and no reward.

So what should you do in 2020? Keep in mind 2019’s most important lesson (which is the same lesson from every year before): Stay a long-term investor in a broadly diversified portfolio. Reduce your anxiety by accepting the market’s inevitable ups and downs. Make sure the people advising you align with your perspective. Stop trying to time the markets, and you’ll find you have more time to do the stuff you love to do.

Footnotes

¹Source: MSCI World Index
²Source: Bloomberg Barclays Global Aggregate Bond Index

Disclosures

This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.

Diversification neither assures a profit nor guarantees against loss in a declining market.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

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2019-10-02

Market Price Tells Us About Long-Term Expected Returns, Says Dimensional Fund Advisors

Always amusing to see people from Dimensional interviewed on TV. Although the anchor desperately tries to extract the usual fluff about market signals, Peng Chen, Asia ex-Japan chief executive officer at Dimensional Fund Advisors, calmly explains how markets actually work.

I saw this video from one of Robin Powell’s posts on LinkedIn.

From Bloomberg:Peng Chen, Asia ex-Japan chief executive officer at Dimensional Fund Advisors, discusses his investment strategy, the signals he’s seeing in equities and fixed income markets, his portfolio, investing in commodities, his views on risk, his strategy for gold and investing in a low-rate environment. He speaks exclusively on “Bloomberg Daybreak: Asia” from the sidelines of the Milken Institute Asia Summit in Singapore. (Source: Bloomberg).

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2019-09-18

Jim Cramer “Evolves” Into Advocate For Index Funds

If you follow Jim Cramer’s CNBC show, “Mad Money,” you finally heard advice that may help improve your odds of success.

Cramer once flipped out on a CNBC guest who promoted John Bogle’s approach to investing, screaming “I’ve had it with the people who tell me about the index fund.”

I’ve mentioned Cramer in some of my blogs, media mentions, and articles as an example of why you should ignore the financial news media. His show is entertainment, as is almost everything else you see on CNBC and the other financial news channels. The advice and information you get from these shows rarely have anything to do with principles that actually help your odds; on the contrary, watching these channels can be detrimental to your investment success. And if you like picking stocks or timing the market, then you shouldn’t have been watching Cramer at all. His track record is dismal.

It took Cramer a long time to “evolve,” despite decades of data, research, and empirical evidence that showed speculation to be a losing investment strategy. Rather than being criticized for ignoring the evidence for so long, he should be given some credit for admitting the change in his attitude toward indexing after all this time. His audience will benefit. Here’s the full article. And here’s part of the clip:

The Global Risks Report 2020 – This Is What The World Is Worried By