----- Meeting Notes (1/12/13 12:09) -----Welcome to Schroeder, Braxton & Vogt's review of the investment markets during the fourth quarter of 2012. I'm Richard Schroeder, executive vice president and certified financial planner with SBV.
----- Meeting Notes (1/12/13 12:09) -----I'd like to take a look at the environment in which markets operated during the end of 2012, and the performance of various investment asset classes in that environment. We are going to focus on how we at SBV were able to take advantage of extra returns offered by asset classes that we emphasize in our portfolios: including small and value stocks, international diversification, commercial real estate, and commodities. We will end by examining the excuses we hear some investors use for not staying fully invested in a rational, well diversified portfolio.
----- Meeting Notes (1/14/13 11:06) -----This page shows why we can't judge the progress of our diversified portfolios by looking at the action in the Dow Jones Industrial or S&P 500 aerages. At left you can see that big U.S. stocks, the kind that make up the Dow and the S&P, gained just a quarter of a percentage point in the third quarter. Yet stocks in Europe and Asia gained almost 6 percent, following by emerging markets stocks with a gain of 5.6 percent and global commercial real estate gaining 3.8 percent. Our portfolios hold all three of these asset classes. The action in U.S. bonds also doesn't predict how our portfolios will do, because we also hold international bonds. You can see here that global bonds were ahead of domestic bonds during the fourth quarter.
----- Meeting Notes (1/14/13 11:06) -----As usual, there was plenty to worry about in the fourth quarter. A recession in Europe, slowing growth in China, and the U.S. fiscal cliff did their best to scare investors out of the markets. SBV's clients held on and profited handsomely.
----- Meeting Notes (1/14/13 11:06) -----The progress of indexes that track world investment asset classes really demonstrate why we diversify. The S&P 500 Index lost a fraction of a point during the quarter, while world value stocks gained almost 7 percent. In fact, every asset class listed here did well except for cash and large U.S. stocks.
----- Meeting Notes (1/14/13 11:06) -----We have long believed in diversifying among small value stocks and large value stocks. That diversification paid off in the fourth quarter, as you can see in the upper right. Down below we see an even stronger case for diversification into small stocks. Note that small stocks gained almost 10 percent per year over the last decade, while large cap stocks gained about 7 percent per year.
----- Meeting Notes (1/14/13 11:06) -----Although we heard a lot about troubles in Europe, Japan, and China last year, their markets did pretty well. Look at the one year returns in the bottom right corner - they easily outpaced U.S. stocks. International diversification helped SBV's portfolios during 2012.
----- Meeting Notes (1/14/13 11:06) -----Emerging markets stocks include the stocks of smaller countries like Singapore, Chile, Mexico, and those of big developing countries like China and India. These markets turned in a good overall performance in the fourth quarter. During 2012 and over the last 10 years their performance has been nothing short of spectacular, as you can see in the lower right corner.
----- Meeting Notes (1/14/13 11:06) -----I like this chart because it illustrates why it is so hard to predict markets. For several years we have been hearing about how Greece is headed for total bankruptcy and an exit from the Eurozone. Yet what was the best market to invest in during the fourth quarter? Greece, of course, with a gain of almost 18 percent in just three months. And the worst developed markets? The U.S. and Canada, with paltry returns.
----- Meeting Notes (1/14/13 11:09) -----Here is another asset class we use, commercial real estate investment trusts. These trusts own commercial office buildings, hospitals, even prisons, and profit from collecting rent and selling properties for capital gains. In recent years we diversified from holding just U.S. REITS to holding international REITS as well. This helped us in the fourth quarter, when international REITS beat their U.S. counterparts by a three to one margin.
----- Meeting Notes (1/14/13 11:09) -----We also diversify into commodities, as asset class that often runs counter to the stock market. That's what happened during the fourth quarter, when most commodities lost value. It is interesting to note that today's sexy commodity, gold, lost ----- Meeting Notes (1/14/13 11:13) -----nearly 6 percent during the quarter while distinctly un sexy lean hogs gained nearly 8 percent.
----- Meeting Notes (1/14/13 11:13) -----This is a very important slide for those who are trying to predict the economy. In the upper left panel we see the current U.S. Treasury yield curve. It charts interest rates on U.S. Treasuries from short term - the 3 month treasury bills at the far left, to 30 year Treasury Bonds at the far right. This is what's know as a steeply sloped yield curve, meaning the line ascends from left to right indicating that higher interest rates are being paid on long term Treasuries than on short term Treasuries. This means that bond market participants, who are considered the savviest investors, are betting that the economy will continue to grow in the near future and that no recession is imminent.
----- Meeting Notes (1/14/13 11:15) -----Finally, this slide shows that investors were paid for taking risks during the quarter, during the year 2012, and over the last 10 years. A portfolio 100 percent invested in stocks grew by 3 percent in the quarter, almost 17 percent during the year and by 8.7 percent per year over the last 10 years. meanwhile, a portfolio in cash, represented by short term U.S. Treasury Bills, gained next to nothing in the quarter, the year, and just 1.7 percent per year over the last 10 years. This shows there is a price to be paid by hiding in "safe" cash. The price is a loss in purchasing power to inflation.
----- Meeting Notes (1/14/13 11:32) -----We hear a lot of these money excuses from clients, friends and relatives. It's worth taking your time to read all of these and identifying those you have used in the past. In our opinion they are all portfolio killers.Its worth noting those that would have hurt you last quarter, such as No one, I just want to wait till things become clearer. We heard that applied to the fiscal cliff crisis. Some of you wanted to wait to see how it would turn out before committing more money to a portfolio But the price of waiting was big, given that we literally didn't know how things would turn out until the last hours of the year. By that time, the markets had jumped strongly. In order to profit from the fiscal cliff one needed to accept some risk and invest when the outlook was not yet clear. Also, look at number 7, But the newspaper said, and number 8, the guy at the bar/my uncle/my boss told me. News headlines, as usual, screamed out doom and gloom during the quarter. And people we know picked up on that. I was told by a number of people that they wanted to get out of the market because so and so had told them a financial apocalypse was nigh. Yet, as is often the case, things turned out better than expected. There is no certainty when investing. That's why we have developed diversified portfolios that dont risk everything in any one market and that have a better chance of weathering different market conditions and economic climates. Thanks for taking the time to go back over the fourth quarter with us. Enjoy the new year.
Quarterly Market ReviewFourth Quarter 2012This report features world capital market performance Overview:and a timeline of events for the last quarter. It begins witha global overview, then features the returns of stock and Market Summarybond asset classes in the US and international markets. Timeline of EventsThe report also illustrates the performance of globallydiversified portfolios and features a topic of the quarter. World Asset Classes US Stocks International Developed Stocks Emerging Markets Stocks Select Country Performance Real Estate Investment Trusts (REITs) Commodities Fixed Income Global Diversification Quarterly Topic: The Top Ten Money Excuses
Timeline of Events: Quarter in ReviewFourth Quarter 2012 Swiss bank UBS agrees Euro zone unemployment to pay $1.5 billion in fines continues to rise, to international regulators reaching new high of in connection with US Congress Hurricane Sandy Consumer debt in Canada 11.6% in September. LIBOR scandal. struggles to devastates portions reaches record 166% of disposable income. come to deal to of Caribbean and avert “fiscal Mid-Atlantic coast of US. cliff.” Japan launches additional stimulus to help boost country’s declining GDP. Growth in China’s economy Euro zone officially continues to slow for Barack Obama falls back into seventh straight quarter. re-elected recession, marking its second downturn president of in four years. United States. S&P 500 Index1,444 1,42609/30/2012 12/31/2012The graph illustrates the S&P 500 Index price changes over the quarter. The return of the price-only index is generally lower than the total return of the index that also includes the dividend returns. Source: The S&P data areprovided by Standard & Poors Index Services Group. The events highlighted are not intended to explain market movements. 4
International Developed StocksFourth Quarter 2012 Index ReturnsInternational developed equities posted strong Ranked Returns for the Quarter (%) US Currency Local Currencyperformance, with all major asset classes showinggains for the quarter. 6.96 Value 7.87The US dollar appreciated relative to most major foreigndeveloped currencies. 5.93 Large Cap 6.90Across the size and style spectrum, large caps 4.90outperformed small caps and value outperformed growth. Growth 5.95 4.84 Small Cap 6.68 World Market Capitalization—International Developed Period Returns (%) * Annualized Asset Class 1 Year 3 Years** 5 Years** 10 Years** Large Cap 16.41 3.65 -3.43 8.60 41% International Small Cap Value 17.48 17.29 7.19 2.78 -0.70 -3.72 12.04 9.06 Growth 15.48 4.46 -3.18 8.05 Developed Market $13.8 trillionPast performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USAGrowth). All index returns are net of withholding tax on dividends. World Market Cap: Non-US developed market proxies are the respective developed country portions of the MSCI All Country World IMI ex USA Index. Proxiesfor the UK, Canada, and Australia are the relevant subsets of the developed market proxy. MSCI data copyright MSCI 2012, all rights reserved. 7
Emerging Markets StocksFourth Quarter 2012 Index ReturnsEmerging markets returned 5.58%, with all other major Ranked Returns for the Quarter (%) US Currency Local Currencyequity sub-classes posting positive returns. The growtheffect was mixed across the size spectrum. Value 6.42outperformed growth in mid cap and small cap stocks Growth 6.20but underperformed in large caps. 5.58 Large CapThe US dollar depreciated against most of the main 5.33emerging markets currencies. 5.10 Small Cap 4.82 4.70 Value 4.43 World Market Capitalization—Emerging Markets Period Returns (%) * Annualized Asset Class 1 Year 3 Years** 5 Years** 10 Years** Large Cap 18.22 4.66 -0.92 16.52 13%Emerging Small Cap Value 22.22 15.87 4.21 4.06 0.21 0.07 17.27 18.17 Growth 20.56 5.24 -1.95 14.84 Markets $4.4 trillionPast performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCIEmerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap: Emerging markets proxies are the respective emerging country portions of the MSCI All Country World IMI ex USAIndex. MSCI data copyright MSCI 2012, all rights reserved. 8
The Top Ten Money ExcusesFourth Quarter 2012 Human beings have an astounding facility for 3) "I WANT TO LIVE TODAY. TOMORROW 8) "THE GUY AT THE BAR/MY UNCLE/MY self-deception when it comes to our own money. CAN LOOK AFTER ITSELF.” BOSS TOLD ME…” Often used to justify a reckless purchase, its The world is full of experts; many recycle stuff We tend to rationalize our own fears. So instead not either/or. You can live today and mind your theyve heard elsewhere. But even if their tips of just recognizing how we feel and reflecting on savings. You just need to keep to your budget. are right, this kind of advice rarely takes your the thoughts that creates, we cut out the middle circumstances into account. man and construct the façade of a logical-sounding 4) "I DONT CARE ABOUT CAPITAL GAIN. argument over a vague feeling. I JUST NEED THE INCOME.” 9) "I JUST WANT CERTAINTY.” Income is fine. But making income your sole Wanting confidence in your investments is fine. These arguments are often elaborate, short-term focus can lead you down a dangerous road. But certainty? You can spend a lot of money trying excuses that we use to justify behavior that runs Just ask anyone who recently invested in to insure yourself against every possible outcome. counter to our own long-term interests. collateralized debt obligations. While it cannot guard against every risk, its cheaper to diversify your investments. Here are ten of these excuses: 5) "I WANT TO GET SOME OF THOSE LOSSES BACK.” 10) "IM TOO BUSY TO THINK ABOUT THIS.” 1) "I JUST WANT TO WAIT TILL THINGS Its human nature to be emotionally attached to We often try to control things we cant change—like BECOME CLEARER.” past bets, even losing ones. But, as the song market and media noise—and neglect areas where Its understandable to feel unnerved by volatile says, you have to know when to fold em. our actions can make a difference—like the costs of markets. But waiting for volatility to "clear" before investments. Thats worth the effort. investing often results in missing the return that 6) "BUT THIS STOCK/FUND/STRATEGY can accompany the risk. HAS BEEN GOOD TO ME.” Given how easy it is to pull the wool over our own We all have a tendency to hold on to winners eyes, it can pay to seek independent advice from 2) "I JUST CANT TAKE THE RISK ANYMORE.” too long. But without disciplined rebalancing, someone who understands your needs and By focusing exclusively on the risk of losing money your portfolio can end up carrying much more circumstances and who holds you to the promises and paying a premium for safety, we can end up risk than you bargained for. you made to yourself in your most lucid moments. with insufficient funds for retirement. Avoiding risk can also mean missing an upside. 7) "BUT THE NEWSPAPER SAID…” Call it the "no more excuses" strategy. Investing by the headlines is like dressing based on yesterdays weather report. The market has usually reacted already and moved on to worrying about something else.Adapted from “The Top Ten Money Excuses” by Jim Parker, Outside the Flags column on Dimensional’s website, October 2012. This information is provided for educational purposes only and should not be consideredinvestment advice or a solicitation to buy or sell securities. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. 14