A Look at Investment Performance in 2017

The 2018 new year: a time to refresh one’s perspective on the financial markets, both past and future. ACWI: Write it down or enter it in your smartphone or computer. It is the stock symbol for an exchange-traded fund (ETF) that tracks the MSCI ACWI IMI global stock market index. ACWI stands for All Country World Index, which includes U.S. and foreign stocks of all sizes. We need to start a campaign to have TV, radio, and internet outlets announce this index every day and not just the Dow, S&P 500, and NASDAQ, which are all U.S. large-company stock indices. For 2017, ACWI was up 24.35% compared with the Standard & Poor’s 500 Index, which was up 21.83%.

Here is the biggest Fun Fact to know: Calendar year 2017 was the first year that the Standard & Poor’s 500 Index and Dow Jones Industrial Average went up every month, with not a single down month for the year. Talk about low volatility!

No surprise, our multi-asset class investing strategy was successful in 2017. The biggest and best news, in terms of dollar allocations in our portfolios, is that international stocks (including developed markets, value style, and emerging markets) outperformed U.S. stocks across the board for the first time in five years. This explains why ACWI beat the S&P 500. Patience pays off for long-term investors who adhere to a multi-asset class strategy.

The best-performing assets classes in 2017 were ones that you probably wouldn’t have picked in advance based on 2016 performance. International Emerging Markets stocks were up 31.38% compared with 11.50% in 2016, U.S. Large Growth Style stocks were up 27.80% compared with 5.99%, and International Value Style stocks were up 26.09% compared with 8.41% in 2016.

Multi-asset class investing also prevents one from “chasing past performance,” and this was also successful in 2017. The best-returning asset classes of 2016 were U.S. Small Cap Value at 28.26% and U.S. Microcap at 25.63%. Returns in 2017 were 7.21% and 11.18% respectively—not bad, but if one over-weighted these assets classes, one’s returns would have been below a more broadly diversified portfolio.

In summary, international stock performance boosted our returns in 2017. U.S. stock performance was muted by the underperformance of U.S. Mid-Caps and Small-Caps vs. Large-Caps (Large up 21.83%, Mid up 16.24%, and Small up 13.23%). Part of this is attributable to very strong U.S. Small performance in 2016, so 2017 was a reprieve.

U.S. Large Cap Value style performance of 19.17% lagged U.S. Large Cap of 21.83%, but the pendulum swung in favor of U.S. Large Cap Value in December 2017 and the fourth quarter of 2017, so hopefully that momentum will continue in 2018.

Dividend growth has also rewarded stock market investors in 2018. Companies increase their cash dividends as revenue and profits increase, and this rewards investors separately from share price changes. Stock dividend income has also proven to be a pretty reliable source of income and offers growth in income better than bonds.

Here are the annual dividend growth percentage increases for 2017 for commonly held mutual funds:


One Year

Five Year Annualized

Vanguard Total Stock Market Admiral Shares:



Vanguard 500 Index Fund Admiral Shares:



Vanguard Dividend Appreciation Fund:



Turning to the future, what is our outlook? Our crystal ball is no clearer than yours, and we do not make future forecasts. Nonetheless, some basic data serve as indicators.

Inflation perked up, measuring 2.2% for the 12 months ending 11/30/17 compared with 1.7% for the previous 12 months and 3% to 4% for long-term historical averages. Inflation is projected to be about 2% annually over the next five to 10 years. An increasing wage rate caused by low unemployment may rekindle a higher inflation rate.

The S&P 500 P/E ratio is 26, which is high and indicates below-average future returns.

The S&P 500 dividend yield is 1.8%, which is low but close to five-year U.S. Treasuries.

Volatility was remarkably low in 2017, but investors must guard against a sense of complacency. Volatility creates the risk that causes stocks to have higher returns over time. (Remember the 3 R’s: Risk and Return are Related.)

The key benchmark for any investment portfolio should be inflation and maintaining and increasing purchasing power through price appreciation and increased dividend income.

With low inflation and a slow-growing economy, investment returns are likely to be lower in the years ahead. While historically inflation was 4% and investment returns of 6% to 8% were targeted, with an expected 2% inflation rate, portfolio investment returns of 4% to 6% will achieve the same result.

Our motto for 2018: Investors should adjust investment return expectations to be more modest but be confident that long-term goals are still achievable given low inflation.

Remember a few key lessons for 2018:

  1. Successful investing is a contrarian process. Sell high, buy low, and be willing to do what your gut tells you not to do. Don’t follow the crowd.
  2. Successful investing requires a tolerance for volatility and a long-term focus.
  3. A strategic asset allocation in a broadly diversified, multi-asset portfolio emphasizing passively managed funds is a sound investment strategy.

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