Updated: Apr 23
Who could have predicted a year ago the unprecedented potential for wealth in the market we have seen? Certainly, in March last year, the prospects looked bleak. If someone had told you last March 31st that by next year, the US Stock Market would be up by 62.53%, making the five year and ten year returns into the double digits with 16.64% and 13.79% respectively, few people would believe it (see page 4 of the our latest Quarterly Market Review for first quarter 2021 prepared by Dimensional Fund Advisors).
While returns like these may sound almost unbelievable, that is the actual view of hindsight for the returns we saw last quarter. Despite the positive and negative headlines of the first quarter 2021, World Stock Market Performance showed modest growth of 4.04% for the quarter (see page 3). However, expanding our vision over the past year, the Long-Term Market Summary is more dramatic with positive US Stock Market returns of 1 year of 20.89%, 5 years of 15.53% and 10 years of 13.79% respectively (see page 4).
Although the pandemic may have brought unprecedented difficult times, nearly one year later, it has also brought unprecedented growth no one saw coming, with the Dow closing above a historical 33,000 for the first-time last month and above 34,000 in April (see page 5).
1. Which Asset Classes Posted Positive Gains?
While often the time horizon for showing the gains for Small Company Stocks and Value Stocks can be much longer, Small Value Stocks and Small Company Stocks posted significant gains of 21.17% and 12.70% in the first quarter (see page 8). That is why we continue to recommend the importance of diversifying a portfolio to include more than just Large Company Stocks, as noted in a few of our recent past Investment Insights:
Our February Investment Insights reported on Small Company Stocks outperforming Large Company Stocks, and the importance, in our opinion, of diversifying a portfolio to include more than just Large Company Stocks.
Our 3rd Quarter Market review published in November, the video from Dimensional on the importance of considering “Why Value?” showing the importance of Value Stocks as part of diversified portfolio, based on the historical record.
In this quarter, Value Stocks outperformed Growth Stocks across Large and Small Company Stocks, and Small Company Stocks outperformed Large Company Stocks. Emerging markets also posted positive returns, underperforming the US and Developed International Stocks, but Value Stocks outperformed Growth Stocks, and Small Company Stocks outperformed Large Company Stocks (see page 8-10).
Spurred by interest rates generally increasing during the first quarter, Bonds were down. The US Bond Market was down 3.37% and the Global Bond Market was down 1.90 (see page 15).
2. What is the Best Potential Investment Strategy?
Based on this quarter returns, some investors may ask what the best strategy may be going forward? Pick a winning stock? Win the lottery? Investors can learn from the Mitch Chamberlain’s personal experience of the highs and lows of both of these strategies and a potentially better way to invest in the following video:
While some may want to look for the big winners to get rich quick, we continue to advocate for an investment philosophy people can stick with in the long-term—based on sound academic evidence and diversification, based on an individual investor’s circumstances and long-term, personal financial goals.
Noteworthy research is graphed on page 17 of the Market Review showing what would happen in 20 years to various possible mixes of stocks and bonds for investments: 100% stock portfolio versus 100% Treasury Bills or 75/25, 50/50 or 25/75? While past performance is not always an indicator for future performance and larger allocations to stocks are considered riskier, the graph (see page 17) shows the relationship between risk and return and of how wealth can grow over a 20-year time horizon.
3. The “GameStop Gamble” – What Do We Learn?
What about GameStop? What was all that about? Page 18 takes a look at the phenomenon of the YOLO traders and social media investors who drove up the prices of a handful of “MEM stocks.” The GameStop “short squeeze” tactics were fueled by investors wanting to be part of a social movement, hoping to strike rich with a lucky stock pick. Will their tactics have an impact on the impact of the efficient market hypothesis (EMH), and if so, what will it be?
EMH basically states that prices reflect all available information. Complex systems fuel the Supply and Demand for stocks, but while the market is not always efficient or rational, there are always 2 sides—with a buyer and a seller—a profit for every loss. While there will always be internet fads, and “YOLO” is true that you only live once. However, the theoretical and empirical research continues to show that
“...the theoretical and empirical research continues to show that higher expected returns come from lower relative prices and higher future cash flows to investors. Long-run investors can be better served by using markets, rather than chatrooms, for information on expected returns.”
Treating the market like a casino is a short-term approach where short-term bets are placed on what to pick, when to buy and when to sell. In contrast, investing is long-term, and investors have strategies to manage the risk such as buying a little bit of multiple companies and holding them for a long time. This is more a bet on human ingenuity to find productive solutions to the world’s problems.