According to Dimensional Fund Advisors’ 2014 Review, two non-U.S. developed countries (in the MSCI Index) experienced 2014 annual returns of +22.77% and –22.04% in seesaw fashion. Can you guess which two these might be? Since there are so many to choose from, let’s narrow it down. Those highest and lowest returns came out of Israel and Norway. Now, which was which?
You’d be correct if you guessed that Israel experienced the highest returns of any MSCI Index country in 2014, with Norway experiencing the lowest. If you find that a bit surprising, you’d be realizing how arbitrary and unpredictable annual returns can be. The same can be said about U.S. large stocks experiencing a bang-up, double-digit year, even though all other major indices around the globe headed in the opposite direction.
It so easily could have – and historically often has – been exactly the opposite, with international indices besting the U.S., or with both moving together. The same can be said for the finer dimensions of investing, such as small and value companies’ expected premium returns.
This year’s Dimensional Review reinforces our timeless message: Trying to position your portfolio to be at the right place at the right time by interpreting annual (or even multi-year) events remains as unlikely a tactic as ever for building long-term wealth.
Besides offering an informative snapshot of the 2014 markets against the backdrop of world news, the report explains how the premium returns expected from investing in various market factors often happen when you least expect them. “In the three-year period from 2009 to 2011, both value and small caps underperformed,” the report explains. “Yet, despite even extended negative-premium periods, small caps and value have outperformed over time, and when the premiums reversed, they often did so strongly and in multiple years.”
So what do we suggest for 2015 in light of Dimensional’s 2014 report? As the future remains as inscrutable as ever, our advice remains the same: Target market risks and expected rewards according to your personal financial goals. Diversify broadly – and, yes, still internationally – to counteract the risks inherent to any overly concentrated position, anywhere in the world. Talk to us if you could use additional insights or strengthened resolve.