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Perspective: Our Annual Year in Review for 2017

Year in Review Investment Management

Happy New Year! With 2017 in the rearview mirror, we’re pleased to reflect on – and share with you – a newly released Dimensional Fund Advisors 2017 Market Review.

Overall, the view is quite pleasant for most global and domestic returns alike, even though few financial forecasters were predicting this sort of slam dunk at the outset of the year. If you think back to last January, there were plenty of reasons to wonder about the next 12 months – what with Brexit uncertainties, U.S. election upsets, continued terrorist threats hitting all too close to home, and the usual litany of other unknowns.

Digging deeper into the heady, mostly double-digit 2017 stock market returns, there’s another important theme found in this year’s data: While the profitability premium was positive across most markets, small-cap and value premia often underperformed their large-cap and growth counterparts. 

These data points are relevant, because a typical evidence-based investment strategy calls for steadfast diversification across these expected sources of market premiums (as always, according to your unique financial goals and risk tolerance).

It’s especially pertinent to those who may be tilting their portfolio mix toward the very premia that happened to relatively underperform this year. If that’s you, and you’re in pursuit of these factors’ higher expected long-term returns, you may be wondering: “Should I alter my plans?

Unless your own goals or circumstances have changed, our short, evidence-based answer is, no, probably not. As described in Dimensional’s Year in Review, “Premiums can be difficult if not impossible to predict and relative performance can change quickly, reinforcing the need for discipline in pursuing these sources of higher expected returns.”

You did not suffer though. As Co-CEO and CIO Gerard O’Reilly of Dimensional Fund Advisors explained to The Cogent Team in a study group session just last week, the return of a well diversified portfolio leaning into small and value factors did nearly as well when juxtaposed to the market portfolio. So, as Gerard explained, returns were still profound due to efficient and patient trading, effective tax management and security lending sources of income. So there.

To use an analogy, think of your investment experience as a cross-continental trek. You get to define your desired destination – although, as in real life, you aren’t guaranteed to reach it. In pursuit of your journey’s end, you also get to choose between a low, slow, temperate trail (lower risk and lower expected returns), or a potentially swifter route with more peaks, valleys and weather extremes (higher risk and higher expected returns).

Whichever route you’ve chosen for your financial journey, don’t be too surprised when you encounter what you’ve signed up for. And remember, the most likely way to achieve your goals is almost always in the form of a steadfast, forward march.

Which brings us to our fundamental advice, this and every year. If you’ve not yet put your investment plans in place, consider that among your most important New Year’s resolutions. Balance your risk and expected return exposures according to what you want and need out of the markets. After that, enjoy the balmy returns where they exist and as they last. Be prepared to soldier through the storms when they periodically arise as well.

Last but never least, let us know how we can help.

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Dimensional Fund Advisors 2017 Market Review can be found HERE.