A Good Month for Our Portfolios

September was a good month for your portfolio. Not only did the overall market rise, but almost all asset classes outperformed the US Large Cap S&P 500. So our broadly diversified, multi-asset-class strategy was very successful.

Here is a summary of some of the major asset classes, using DFA funds as a proxy:

+6% U.S. Small Cap Value stocks
+5% International Value stocks
+4% U.S. Large Cap Value stocks
+3% International Developed Market stocks
+3% International Emerging Market stocks
+2% U.S. Large Company stocks (S&P 500)

One month does not a trend make, but we will be better off when the trend of dominance by U.S. Large Company stocks breaks in favor of international stocks, value-style stocks, and small-company stocks.

Bonds and Interest Rates

We don’t write about bonds much, but interest rates continue to pose a challenge. At the beginning of 2019, most indicators pointed to interest rates slowly rising during the year. After four interest rate increases of 0.25% each in 2018, the Federal Reserve has turned around and cut interest rates twice in 2019—in August and September—also by 0.25% each.

A one-year Treasury bill now yields about 1.7%, five-year Treasury notes are lower at about 1.5%, and you have to go out to a 30-year Treasury note to get a yield over 2%. Forecasting future interest rates, just like forecasting the stock market, is a challenging and futile exercise.

We manage our client bond portfolios with an “all weather” strategy. Bonds range from one year to 30 years in maturity. We invest about 40% of a portfolio bond allocation in money markets and short-term bonds, wherein the short-term bonds range from three to seven years in maturity, and 60% in intermediate-term bonds, which range from seven to 15 years in maturity.

The longer the maturity date of a bond, the more it will fluctuate up or down in price in the opposite direction of interest rates. So, as interest rates go up, bond prices go down. By including short-term bonds in our portfolios and avoiding long-term bonds, we minimize the potential price swings.

We err on the conservative side with bonds and see them as an anchor against stock market volatility, the latter being where the best growth potential lies.

We prefer to emphasize stocks for current dividend income and growth in dividend income. Current stock dividend yields in our most commonly used funds are in the 2% range—so about equally competitive with bonds for income.  

As always, please contact us with any questions, news, or comments.