JDH Wins “Best of 2019”

JDH is proud to announce that we have been voted “Best Of 2019” in the North Bay*! Thank you for your vote of confidence and we will continue to excel for you into the future! Here is a quote from the article in North Bay Biz’s Annual Readers’ Poll Award Guide:

“Recognized once again by the NorthBay biz readers as Best Wealth Management Firm, the company guides its clients through the various emotional, practical and market vagaries on to a path to retirement security that is right for them.”

– Bonnie Durrance

*NorthBay biz magazine’s BEST Of the North Bay bonus edition is published by NorthBay biz magazine, an independent company unaffiliated with JDH Wealth Management, LLC. The annually-released awards bestowed by the magazine are based on the number of votes accrued in online and paper ballot voting each year between December and February. NorthBay biz solicits responses online, by paper ballot in their magazine, and through radio spot promotions. In order for each ballot to qualify they must vote for at least 12 categories out of a total 36 possible categories. Based on the top votes from the community Best Of (first place) and Gold Medal (second place) are awarded. JDH Wealth Management, LLC, did not solicit submissions and did not pay to be included in this ranking. Working with a ranked advisor should be evaluated properly and has no correlation to investment results. Working with a highly-ranked advisor does not ensure that a client or prospective client will experience a higher level of performance or results. Third-party rankings are no guarantee of future investment success or performance. This ranking is conducted by a third-party provider and not meant to serve as an endorsement for JDH Wealth Management, LLC. Rankings should not be considered an endorsement of the wealth manager by any client, nor are they representative of any one client’s evaluation. Provided for informational purposes only. Please see http://northbaybiz.com/Bonus_Issues/NorthBay_biz_Best_of/ for further information.
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Does Money Buy Happiness?

Larry Swedroe, Chief Research Officer, 5/2/2019

There’s a cliché that money can’t buy happiness. Is that true? Thanks to research from Nobel Prize-winning economist Daniel Kahneman and Angus Deaton, authors of the 2010 study “High Income Improves Evaluation of Life But Not Emotional Well-Being,” we can answer the question: It does—to a point. Kahneman and Deaton found that happiness tends to increase along with income up to about $75,000 a year.

They found that the lower a person’s annual income falls below that benchmark, the unhappier he or she feels—having to worry about putting food on the table, providing decent shelter, and having access to good health care.

However, no matter how much more than $75,000 people make, they don’t report any greater degree of happiness. The authors concluded that “high income buys life satisfaction but not happiness, and low income is associated both with low life evaluation and low emotional well-being.”

The $75,000 benchmark, of course, depends on where you live. Updating the data, a 2016 study by Doug Short of Advisor Perspectives found that if you reside in a place like Hawaii, where the cost of living is relatively high, a household needs to make about $122,000 per year before incremental income doesn’t really translate into more happiness. In Mississippi, by comparison, the threshold at which more money stops making you happier is only about $66,000.

Understanding how income and wealth impact happiness plays an important role in retirement planning. It helps determine both your need to save and how much risk you need to take (how much you need to allocate to risky assets). Together with return assumptions, it will help you determine how much wealth you need to accumulate to be happy in retirement.

Confirming Data

Thanks to the Spectrem Group, a research and consulting group focusing on the wealthy, we have some new insights into the relationship between wealth and happiness. In their April 2019 Millionaire Corner Monthly, Spectrum reported on the findings from a survey of 700 wealthy investors (minimum wealth of $100,000, not including the value of their home, all the way to $25 million) who were asked to rate their level of happiness on a 0-100 scale. Here is what they found.

Investors with a net worth between $100,000 and $500,000 had a happiness score of 63.8. Happiness soared to 76.9 for investors with a net worth of between $10 million and $15 million. However, investors with a net worth between $15 million and $25 million scored their happiness level at just 71.9, well below that of their $10 million to $15 million cohorts.

What is perhaps even more surprising is that when asked to rate their financial situation, those with a net worth under $500 thousand scored 57.5 and those with a net worth between $10 million and $15 million scored 82.7, but those with a net worth between $15 million and $25 million scored just 75.2—more wealth made them less happy! Hard to believe.

How do we explain these results? One explanation is that having “too much” money can negatively impact happiness. We see that in the responses to the question rating the level of happiness with the investors’ relationship with their children. The results followed the same pattern of increasing happiness until one reached the $15 million level of net worth—the average score rose from 60.4 to 79.3, but then fell all the way to 58.6 for the wealthiest cohort!

What Would Improve Happiness?

When asked what might elevate their level of happiness, most investors cited their investments, with 52% saying a higher return on their investments would make them happier. And the wealthier the investor, the larger the impact of their rate of return.

For lower wealth levels, participants responded that happiness would improve with a higher salary (36%), less personal debt (28%) and a greater return on investments (28%). Despite the research findings, it seems it is simply too easy to believe money buys happiness, even when you have far more than you need to be happy.

It’s been my experience that far too many investors continue to take large equity risks when they have already accumulated more than enough to be happy. Remember, it’s important to understand that once you have sufficient assets to live a comfortable lifestyle, the good things in life—the things that really bring happiness, like reading a book to your grandkids or taking a walk in the park with your spouse—are either free or relatively inexpensive.

Coming to that realization allows you to take less equity risk, which in turn allows you to sleep much better through the next inevitable bear market and helps you stay disciplined, adhering to your plan, and avoid panicked selling.

A version of the article appeared April 26 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2019, The BAM ALLIANCE®

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Active Management’s Impact on Returns and Volatility

Larry Swedroe, Chief Research Officer, 5/13/2019

A vast body of research provides powerful evidence of the failure of active management to generate persistent alpha (risk-adjusted outperformance).

For example, since 2002, S&P Dow Jones Indices has published its S&P Indices Versus Active (SPIVA) Scorecard, which compares the performance of actively managed equity mutual funds to their appropriate index benchmarks.

The evidence contained in its scorecards supports Charles Ellis’ observation that, while it’s possible to win the game of active management, the odds of doing so are so poor that it’s not prudent to try—which is why he called it “the loser’s game.”

Highlighting The Canard

Importantly, the scorecards have highlighted the canard that active management is successful in supposedly inefficient markets like small cap stocks and emerging markets. The body of evidence is why we continue to see a persistent flow of assets away from actively managed funds.

Miles Livingston, Ping Yao and Lei Zhou contribute to the literature with their study “The Volatility of Mutual Fund Performance,” which will appear in a forthcoming edition of the Journal of Economics and Business. Using data from almost 2,100 equity mutual funds covering the 13-year period 1991 through 2012, they examined the impact of expense ratios and turnover on returns as well as on the dispersion of returns.

Following is a summary of their findings:

  • Active management magnifies the extremes of performance.
  • Mutual funds with more active strategies, high expense ratios or high turnover ratios have markedly higher dispersion of performance compared to mutual funds with low expense or turnover ratios or relatively passive strategies.
  • Funds with higher expense ratios and turnover ratio have had greater volatility of performance as well as lower mean performance, a doubly adverse pattern.
  • Funds with higher active share (lower R-squared value) have higher performance variability.
  • If a fund has good performance in one period, high active management amplifies its good performance. If its performance is poor in the next period, high active management magnifies the poor performance. The result is greater time-series volatility in performance for funds with active management relative to funds with more passive management. Thus, the higher risk-adjusted return variability of actively managed funds suggests that static, one-period or historical average Carhart 4-factor alphas might not capture all risks.
  • Performance volatility is highly persistent.

Hope Behind Outperformance

The fact that active funds have higher volatility should not be a surprise, as the only way active funds can overcome their higher expense and turnover ratios is to concentrate their holdings and hope they outperform.

Higher concentration means they are less diversified. Thus, we should expect higher volatility relative to funds with similar exposure to the factors that have been found to explain the variation of returns (such as beta, size, value, momentum and profitability/quality).

Other Interesting Findings

The first interesting finding was that the expense and turnover ratios of high-performing funds are insignificantly different from zero. On the other hand, Livingston, Yao and Zhou found, for poorly performing funds, higher expense and turnover ratios have a “pronounced negative impact on performance.”

The authors then noted: “Since investors do not know in advance which funds will be good performers and which will be poor performers, higher expense ratios and higher turnover ratios increase downside risk without any upside gain.” They concluded: “This finding provides further justification for not investing in high expense funds.”

A second interesting finding was that “Larger mutual funds are less actively managed and, likely as a result, charge lower expense ratios and trade less,” the authors wrote.

Closet Indexing

While lower expense ratios and lower turnover have positive impacts, the lower active share is a sign of closet indexing, which raises the hurdle for generating alpha, as the higher expenses of active management are spread out over a smaller portion of the portfolio.

This is why, unless a successful active fund ceases to take new assets, successful active management contains the seeds of its own destruction.

The third interesting finding relates to the research on active share. In their 2009 paper “How Active Is Your Fund Manager? A New Measure That Predicts Performance,” Martin Cremers and Antti Petajisto found that active share was positively related to future performance.

However, future research has refuted their findings. For example, in May 2012, Vanguard’s research team examined active share as a predictor. Its study covered the 1,461 funds available at the beginning of 2001. Vanguard’s final fund sample comprised 903 funds. Because the study only covered surviving funds, there’s survivorship bias in the data.

Following is a summary of their conclusions:

  • Even with survivorship bias, higher levels of active share didn’t predict outperformance.
  • The higher the active share level, the larger the dispersion of excess returns.
  • The higher the active share level, the higher the fund costs.

These findings not only refute those of Cremers and Petajisto, they are consistent with those of Livingston, Yao and Zhou, which found that active share increased risks as the dispersions of returns increased.

Vanguard’s findings match those of a study by Andrew Ang, Ananth Madhavan and Aleksander Sobczyk of BlackRock. Their study “Estimating Time-Varying Factor Exposures,” published in the Fourth Quarter 2017 issue of Financial Analysts Journal, provided an out-of-sample test (after 2009) of Cremers and Petajisto’s findings.

They found that the measure of active share proposed by Cremers and Petajisto actually was negatively correlated (-0.75) to fund returns after controlling for factor loadings and other fund characteristics. Thus, they concluded it’s “not the case that high-conviction managers outperform.”

Low Turnover’s Predictive Power … Or Not

Cremers updated his work in his October 2016 study “Active Share and the Three Pillars of Active Management: Skill, Conviction and Opportunity.” He now was recommending that active share needed to be combined with low turnover to have significant predictive power.
The problem with that finding, which I confirmed with him, was that it only held true for the first half of the period (through 2001) he studied. Here’s the table he provided me covering the period 2002 through 2015.

As you can see, the active managers in each quintile of active share had negative alphas.

Livingston, Yao and Zhou also examined this issue. They found that, while higher active share was positively related to the performance of the top performers, it was negatively related to the performance of the worst performers. Thus, active share is not a predictor.

Summary

Their findings led Livingston, Yao and Zhou to conclude that: “Mutual funds with more active management, higher expense ratios and turnover ratios are riskier.” They added: “While the lower mean performance of funds with higher expense ratios is well documented, the greater dispersion of performance has been unnoticed.” Forewarned is forearmed.

This commentary originally appeared May 1 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2019, The BAM ALLIANCE®

 

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2018’s Active Vs. Index Scorecard

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Since 2002, S&P Dow Jones Indices has published its S&P Indices Versus Active (SPIVA) Scorecard, which compares the performance of actively managed equity mutual funds to their appropriate index benchmarks.

Most Recent Data

The 2018 report includes 15 years of data. Following are some of its highlights:

  • In 2018, 69% of all domestic funds underperformed the S&P Composite 1500 (in a down year—so much for active managers outperforming in down markets). And 64% of large-cap managers, 46% of midcap managers and 68% of small-cap managers underperformed the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, respectively. However, over longer periods, the results were dismal.
  • Over the five-year period ending 2018, 84% of large-cap managers, 85% of midcap managers and 91% of small-cap managers lagged their respective benchmarks. Similarly, over the 15-year investment horizon, 92% of large-cap managers, 93% of midcap managers and 91% of small-cap managers failed to outperform on a relative basis. Note the poor performance in small-caps, supposedly the most inefficient asset class, where just 9% of active funds outperformed their benchmark index. Even worse was the performance turned in by small-cap growth managers, where 98% underperformed. The least poor performance was in large value, where 79% failed to beat their benchmark.
  • In 2018, the majority of active managers investing in global (71%), international (77%), international small (68%) and emerging market (78%) funds underperformed their respective benchmarks. Again, the results deteriorated as the horizon lengthened.
  • Over the three-, five-, 10- and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks, and the longer the time horizon, in general, the more funds underperformed. For example, over the 15-year horizon, 83% of global funds underperformed, 90% of international funds underperformed, 76% of international small funds underperformed and 96% of those supposedly inefficient emerging market funds underperformed.
  • Over the last 15 years, on an equal-weighted (asset-weighted) basis, the average actively managed U.S. equity fund underperformed by 1.43 (0.73)% per annum. Again, the worst performances were in the small-cap category, with active small-cap growth managers underperforming on an equal-weighted (asset-weighted) basis by 3.08 (1.94)% per annum, active small-cap core managers underperforming by 2.79 (1.85)% per annum and active small value managers underperforming by 2.06 (1.87)% per annum, respectively. So much for the idea that the asset class is inefficient.
  • Over the three-, five-, 10- and 15-year investment horizons, managers across all international equity categories underperformed their respective benchmarks. For example, over the 15-year horizon, 82% of active global funds underperformed, 92% of international funds underperformed, 78% of international small-cap funds underperformed, and in the supposedly inefficient emerging markets, 95% of active funds underperformed.
  • Over the 15-year horizon ending 2018, on an equal-weighted (asset-weighted) basis, active global funds underperformed by 1.36 (0.35)% per annum, active international funds underperformed by 1.78 (0.71)% per annum, active international small funds underperformed by 0.91 (0.09)% per annum, and in the supposedly inefficient asset class of emerging markets, active funds produced the worst performance, underperforming by 2.64 (1.50)% per annum, respectively.
  • The performance in fixed-income funds was also poor. Across the 14 categories, in just two did the majority of active funds outperform (long-term government and long-term investment grade). Over the 15-year period, in no category did the majority outperform, in only two less than 80% underperformed, in four more than 90% underperformed and in high-yield funds, the worst-performing category, 99% underperformed. On an equal-weighted basis, the underperformance ranged from 0.60% (general muni funds) to as much as 3.08% (government long funds). The news was better on an asset-weighted basis, with active funds outperforming in two categories: investment-grade intermediate (0.25%) and global income (0.89%). In the other 12 categories, the underperformance was more than 2% in two categories (long-term government and long-term investment grade), 1.5% in a third category (high-yield) and 0.8% in emerging market bonds.
  • Highlighting the importance of accounting for survivorship bias, over the 15-year period, 57% of domestic equity funds, 54% of international equity funds, 31% of international small funds and 32% of emerging market funds were merged or liquidated. Across the 14 bond fund categories, the merger and liquidation rate ranged from a high of 65% (government intermediate funds) to a low of 32% (global income funds).

While I believe the preceding data is compelling evidence of the active management industry’s failure to generate alpha, it’s important to note that all the report’s figures are based on pretax returns. Given that actively managed funds’ higher turnover generally makes them less tax efficient, on an after-tax basis, the failure rates would likely be much higher (taxes are often the greatest expense for active funds).

Summary

The SPIVA Scorecards continue to provide powerful evidence of the persistent failure of active management’s ability to generate alpha (risk-adjusted outperformance). In particular, they serve to highlight the canard that active management is successful in supposedly inefficient markets (like small-cap stocks and emerging markets).

The scorecards also provide compelling support for Charles Ellis’ observation that, while it’s possible to win the game of active management, the odds of doing so are so poor that it’s not prudent to try—which is why he called it “the loser’s game.” And it’s why we continue to see a persistent flow of assets away from actively managed funds.

Larry Swedroe, Director of Research, 3/18/2019

This commentary originally appeared March 13 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2019, The BAM ALLIANCE®

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The Guide to Happy Giving

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by Tim Maurer, Director of Advisor Development at the BAM Alliance, 11/27/2018

The giving season is underway, with the holidays and year-end bearing down on us. So how can we transform one of the more stressful, and sometimes guilt-ridden, elements of the season into something more life-giving?

Whether you’re giving to a family member, a friend or a cause, please consider the following four directives as a guide to happy giving:

1)   Give out of impulsion, not compulsion. Compulsion to give can arise from the mountain of expectations, perceived or otherwise, heaped upon us at this time of year. (Those expectations are more often self-imposed, by the way.) Impulsion, on the other hand, comes from within. Give because you want to, not because you have to. And don’t give if you don’t want to.

2) Plan your giving. Just because you’re giving from impulsion doesn’t require that you wait for an epiphany to direct you. Sit down and decide who or what organizations are on this year’s list, and how much you plan to spend. This will help ensure that you are not going to suffer in 2017 for your over-zealous, underfunded generosity in 2016. Stick to your budget.

3) Give creatively. What you give someone and how you give it tells him or her more than the mere fact that you gave. You could give your Goth-inspired nephew a Visa gift card that he can spend on anything. Or, you could target his love of music with an iTunes gift card. Or, you could give him Jack White’s “Ultra LP” on vinyl—it plays from the inside out and has a locked groove on side A. And it also shows that you were paying attention enough to know that he has a record player and would probably like that kind of music. Creativity increases the value of your gift.

4) Give participatively. Yes, I know “participatively” isn’t a word, but perhaps it should be. I encourage you to actively participate in your giving, physically as well as fiscally. Especially when it comes to charitable giving. You can write a check, have a positive impact and feel good about it. But you can also get involved, personally interacting with those receiving your financial gifts. These acts of giving can be life-changing, for the giver and the recipient, and this isn’t simply anecdotal advice. Studies back it up, too: “[S]ocial connection helps turn generous behavior into positive feelings on the part of the donor.”

That ever-popular song says this is the most wonderful time of the year. And while it can be, it’s also one of the most stressful times for far too many. Reframing how we view and practice giving can help transform this central element of the holidays from a burden into a blessing.

A version of  this commentary originally appeared December 5, 2014  on Forbes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of JDH Wealth Management or the BAM ALLIANCE®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. © 2018, The BAM ALLIANCE®

 

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Journey to Retirement Article in North Bay Biz

We wanted to share with you that Tim Delaney’s comments have been shared as part of an article in the North Bay Biz Magazine on retirement planning!

Now, they stuck his picture way down on the last page, but if you take the time to read the article (and of course we think you should), you’ll find Tim’s sage advice sprinkled liberally throughout.

It’s a good read for a person of any age, whether you’re nearing your retirement or whether it’s still a twinkle in your eye. There are a lot of calculators you can find that will tell you one thing or another. It’s usually along the lines of, “Sock away this percentage of your income based on having this much in savings already at such-and-such an age.”

The truth is, there’s no magic formula. Planning for your retirement has to be tailored to your own goals and realities.

That said, we hope you’ll enjoy the following article for some thoughtful suggestions of the factors that you should consider as you establish the right retirement plan for you.

Journey to Retirement – North Bay Biz Magazine

(links to PDF)

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Spooked by the market? Don’t be.

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An Awakening Bear?

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Re-Examining Emerging Markets Equity

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By Jared Kizer, Chief Investment Officer, 9/7/2018

Emerging market equities have substantially underperformed the S&P 500 Index in 2018, with the S&P 500 up 6.5 percent and emerging markets down 4.4 percent through July. As I detailed in a recent post on international developed market equities, remaining committed to a globally diversified portfolio can be challenging during extended periods of underperformance relative to the U.S. market. In this post, we’ll look specifically at emerging markets by examining five lessons from long-run and current market data that reinforce some of the reasons investors should remain committed to emerging markets equity investing.

1. Over the long term, the evidence indicates that emerging market equities have outperformed U.S. equities.

From 1988 (the earliest data we have for emerging markets) through 2017, the S&P 500 earned average annual returns of 12.2 percent per year, while the MSCI Emerging Markets Index averaged 16.3 percent per year. In financial jargon, this difference in returns of roughly four percentage points would be referred to as a “risk premium,” indicating that markets have tended to reward long-term emerging markets investors with additional return compared to U.S. equities. This is a sensible result since emerging market equities clearly possess risks that U.S. equities do not. Emerging market investments could expose an investor to currency risk (the risk that emerging markets currencies as a group depreciate relative to the U.S. dollar), heightened geopolitical risk and lower market liquidity when compared to U.S. equities. Markets are aware of these additional risks and appear to have priced them appropriately.

2. Good news: While additional risks are associated with emerging markets investing, those risks are not perfectly correlated to U.S. equity market risk.

The three risks emerging markets investors face (outlined above) are either absent or lower for U.S. equities, but for globally diversified investors there’s a silver lining: Those risks are not perfectly correlated with the performance of U.S. equity markets. To visualize this, let’s look at a scatter plot of the annual returns of the U.S. and emerging equity markets.

Figure 1: MSCI Emerging Markets vs. S&P 500 Annual Returns (1988–2017)

 

Source: Thomson Reuters Lipper

Because the points are fairly scattered and not on the line, this indicates an imperfect relationship between the returns of the two markets, indicating that owning both adds diversification to your portfolio.

3. Historically, a portfolio that included emerging market equities in addition to U.S. equities has had higher risk-adjusted returns than a U.S.-only portfolio.

We can also ask the question of what allocation to emerging markets has been historically optimal for an investor with a 100 percent allocation to equities who wanted to maximize risk-adjusted returns. In the investing world, this means we want to find the portfolio that provided the most return for the volatility it experienced. This is admittedly a theoretical exercise since we can’t go back in time and experience this portfolio (and we certainly can’t expect the future to be identical to the past), but it does give us a general indication of how useful emerging markets have been historically. Over the period 1988–2017, the optimal allocation was about 80 percent to the S&P 500 and 20 percent to emerging markets. This result doesn’t necessarily mean you should allocate 20 percent of your equity to emerging markets (that’s a conversation to have with your advisor regarding your comprehensive financial plan), but it is useful in showing an allocation of zero percent likely doesn’t make sense either.

4. As with international developed market equities, emerging market equities represent a sizable fraction of the world’s equity market wealth.

As of year-end 2017, emerging markets equities were a bit more than 12 percent of the world’s equity market value with total market capitalization of almost $7.2 trillion. As with the analysis above, this doesn’t necessarily mean your allocation should be 12 percent of your equity portfolio, but this is a reasonable starting point. As a very general rule, if the market’s allocation to an asset class is meaningful, then yours likely should be, too.

5. While emerging markets can be a valuable component of a diversified portfolio, be prepared for volatility and potentially long periods of time where it underperforms U.S. equities.

The first four points lay out the case for a long-term allocation to emerging markets. That said, over the shorter term, emerging markets will inevitably have periods when it dramatically outperforms the U.S. equity market and periods when it spectacularly underperforms the U.S. equity market. For investors who are tempted to look at relative performance over shorter periods of time, it helps to understand what you should expect to see. Let’s first look at year-by-year maximum drawdowns of the S&P 500 and the MSCI Emerging Markets. The maximum drawdown is the largest peak-to-trough loss an investment earns over a particular period of time. If we say that the maximum drawdown of the S&P 500 was –20 percent in 1993, that means there was some period of time in 1993 when the S&P 500 declined 20 percent. Figure 2 plots the maximum drawdown in each year from 1988–2017 for the S&P 500 and emerging markets.

Figure 2: S&P 500 and MSCI Emerging Markets Maximum Drawdowns (1988–2017)

Source: Bloomberg

A few things stand out. First, in most years, the MSCI Emerging Markets Index has a drawdown of at least –10 percent and a significant number of years of at least –20 percent. Second, in most years, the maximum drawdown for emerging markets exceeds that of the S&P 500 (although they usually occur at different times during the year). This means investors with an allocation to emerging markets must remember it’s extremely volatile and will inevitably experience periods of substantial underperformance compared to the S&P 500. Let’s now look at rolling five-year returns for the S&P 500 and the MSCI Emerging Markets. Figure 3 presents this data.

Figure 3: Rolling 5-Year Annualized Returns (1988–2017)

Source: Thomson Reuters Lipper

The first five-year period goes through 1992 and the last goes through 2017. I’ve specifically highlighted two of the five-year periods above to give a sense of the magnitude by which U.S. equities have outperformed emerging markets over a five-year period and vice versa. For the five-year period through 1999, the S&P 500 was up 28.6 percent per year, while emerging markets were up just 2 percent per year. Conversely, for the five-year period ending 2007, the S&P 500 was up 12.8 percent per year, while emerging markets were up 37.5 percent per year. These results are even more mind-boggling when you remember that, over the entire period of 1988–2017, emerging markets outperformed the S&P 500 by an average of about 4 percent per year. This just goes to show that short-run results (though five years may feel long for some investors) can diverge from long-run results.

This commentary originally appeared September 6 on MultifactorWorld.com

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Welcome to the New JDH!

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It’s been a whirlwind few years at JDH. Three new members joined our team. We moved in a massive way from being a paper-based firm to a digital firm. We’re even introducing online client portals this fall.

How did we choose the new logo?

We launched into a series of firm meetings to discuss: what are the firm’s goals? How do we see ourselves in the context not only of the firm but in the greater community? What makes us different than other wealth management firms?

We realized that starting conversations with the intent of improving the lives of those we encounter is a central piece of each of us here at JDH Wealth. With that in mind, we decided to find a new image that really speaks to who we are and what we want to accomplish. We dropped the word “management” from the logo, for the purposes of clarity of intent.

We took our name and built it into a symbol of growth, of goals, of aspirations – all with JDH Wealth as the support structure holding those up.

We’re pleased to share with you this rebirth of the JDH Wealth logo, and look forward to supporting you now and in the future.

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JDH Wealth Management, LLC
181 Concourse Boulevard, Suite A
Santa Rosa, CA 95403

Phone: (707) 542-1110
Fax: (707) 595-5776
info@jdhwealth.com

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