The past year was a banner year for US stocks. Widely tracked indices covering US equities, the Dow Jones Industrial Average and the S&P 500, both notched record highs and were up 29.65% and 32.39%, respectively. The Dow tracks 30 of the largest companies in the US weighting each company by its stock price. The S&P 500 is an index of the 500 largest companies by market capitalization, or the value of the share price multiplied by the shares outstanding. The two indices are viewed as a snapshot of the US stock market, but both focus on the largest companies in the US.
RWM, however, believes that the Russell 3000 index is the most appropriate benchmark for the US stock market. The index tracks 3,000 companies covering the vast majority of the US stock market – large companies through small companies. Thus, it provides a more complete view of the US stock market, not simply focusing on mega cap or large cap firms. The index performed even better than the more well known indices mentioned above, jumping 33.55% in 2013.
RWM’s investment philosophy on the equity side of the portfolio is to diversify broadly by investing across the total US stock market, but to also emphasize small company stocks and stocks with a value orientation. We believe that these risk factors will benefit investors the most over the long term. This view is based on a significant amount of academic research viewing equity returns over the past 100 years.
The fund that RWM recommends for exposure to US equity is the DFA US Core Equity fund. The fund invests in all nine “style boxes” including large, mid and small cap stocks, and value, blend and growth stocks, however the fund tilts towards small cap and value giving an investor exposure to the factors we recommend all of in one fund. This “one stop shop” fund was up 36.60% last year, outpacing the benchmark by over 3% and the frequently cited market indices by over 4%. The small cap emphasis was very much in favor over the year and drove the outperformance.
This year was an exceptional year for RWM’s strategy; however there will be times when both the small cap and value tilts are not in favor. RWM believes, based on the extensive academic research that the strong years will outweigh the weaker years over time. Thus, by staying true to this strategy investors will likely be rewarded over the long term.
Index Performance Dec. 4th QTR 2013
US Stock (Russell 3000) 2.64% 10.10% 33.55%
Foreign Stock (FTSE AW ex US) 0.87% 4.74% 15.63%
Total US Bond Mkt. (BarCap Aggregate) -0.57% -0.14% -2.02%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) -0.43% -0.06% -0.12%
Municipal Bonds (BarCap 1-10yr Muni) -0.15% 0.32% -0.32%
Cash (ML 3Month T-Bill) 0.01% 0.02% 0.07%
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Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services. We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets. Visit us at www.raffawealth.com