Focus On What You Can Control

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Diversification May Help You Capture What Global Markets Offer
Percent of world market capitalization as of December 31, 2013

FWC12 global equity market

The global equity market is large and represents a world of investment opportunity.

In US dollars. Diversification does not eliminate the risk of market loss. Market cap data is free-float adjusted from Bloomberg securities data. Many nations not displayed. Total may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. China market capitalization excludes A-shares, which are generally only available to mainland China investors. For educational purposes; should not be used as investment advice. Diversification strategies cannot assure a profit or protect against a loss. Securities of issuers domiciled outside of the United States may lose value because of adverse political, social, economic or market developments in the countries or regions in which the issuers operate. These securities may also lose value due to currency value fluctuations and exchange rate fluctuations. Securities markets in certain countries may be more volatile and less liquid than those in the United States. These securities may be subject to additional risks and individuals should carefully consider the specific risks associated with any investment prior to investing.

Diversification Can Reduce Concentration Risk

Concentrating in one stock exposes you to unnecessary risks.

Diversification reduces the impact of any one company’s performance on your wealth.

Diversification does not eliminate the risk of market loss. Diversification strategies cannot assure a profit or protect against a loss.

Financial Diversification Reduces Risks

Diversification May Prevent You from Missing Opportunity
Compound average annual returns: 1926-2013

Attempting to identify that group of future winners is a guessing game.
Diversification improves the odds of holding the best performers.

FWC14 Compound average annual returns

Diversification does not eliminate the risk of market loss. In US dollars. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. Investing involves risks, including fluctuating values and potential loss of principal. Results based on the CRSP 1–10 Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Diversification strategies cannot assure a profit or protect against a loss.

Diversification Smooths Out Some of the Bumps

A well-diversified portfolio can provide the opportunity for a more stable outcome than a single security.

Illustrative examples. Diversification does not eliminate the risk of market loss. Diversification strategies cannot assure a profit or protect against a loss.

FWC15 diversified portfolio

Diversification May Smooth Out Some Of The Bumps
Annual returns (%): 1999–2013

You never know which markets will outperform from year to year.

By holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

FWC16 globally diversified portfolio

In US dollars. Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Their performance does not reflect expenses associated with the management of an actual portfolio. Source: S&P data provided by Standard & Poor’s Index Services Group. Russell data copyright © Russell Investment Group 1997-2014, all rights reserved. Dow Jones data provided by Dow Jones Indexes. Dimensional Index data compiled by Dimensional. MSCI data © 2014, all rights reserved. The BofA Merrill Lynch Indices are used with permission; copyright 2014 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation. Barclays Capital data is provided by Barclays Bank PLC. Citigroup bond indices © 2014 by Citigroup. Diversification strategies cannot assure a profit or protect against a loss.

Financial Capital Plays a Vital Role in Wealth Creation

Using financial capital and other resources, a business produces goods or services that can be sold for a profit. As providers of financial capital, investors expect a return on their money.

FWC18 investors return on money

Stocks and Bonds Are Conduits for Capital

FWC19 Stocks and Bonds

 

Bondholders are lenders to a company. Stockholders are equity owners in the business. Both expect an adequate return for the terms and risk of their investment.

The Capital Markets Have Rewarded Long-Term Investors
Monthly growth of wealth ($1), 1926–2013

Long Term Investors Financial Planners

In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. US Small Cap Index is the CRSP 6–10 Index; US Large Cap Index is the S&P 500 Index; Long-Term Government Bonds Index is 20-year US government bonds; Treasury Bills are One-Month US Treasury bills; Inflation is the Consumer Price Index. CRSP data provided by the Center for Research in Security Prices, The S&P data are provided by Standard & Poor’s Index Services Group. University of Chicago. Bonds, T-bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

Dimensions Point to Differences in Expected Returns

Academic research has identified these dimensions, which are well documented in markets around the world and across different time periods.

Diversification does not eliminate the risk of market loss. 1. Relative price as measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios. 2.Profitability is a measure of current profitability, based on information from individual companies’ income statements.

Financial Planning Fixed Income Equities

Humans Are Not Wired for Disciplined Investing

When people follow their natural instincts, they tend to apply faulty reasoning to investing.

Disciplined Investing With Financial Planning

Many Investors Follow Their Emotions

FWC26 Financial Market Cycles

People may struggle to separate their emotions from their investment decisions. Following a reactive cycle of excessive optimism and fear may lead to poor decisions at the worst times.

Reacting Can Hurt Performance
Performance of the S&P 500 Index, 1970­-­2013

Missing only a few days of strong returns can drastically impact overall performance.

FWC27 S&P 500 Index 1970­-­2013

In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Performance data for January 1970–August 2008 provided by CRSP; performance data for September 2008–December 2013 provided by Bloomberg. S&P data provided by Standard & Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

Markets Have Rewarded Discipline
Growth of a dollar—MSCI World Index, 1970–2013

FWC28 Growth of a dollar

A disciplined investor looks beyond the concerns of today to the long-term growth potential of markets.

In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data © MSCI 2014, all rights reserved.

This content was created by Dimensional Fund Advisors an is offered for informational purposes only and should not be construed as investment advice.

The Dow Jones Industrial Average is a price weighted average of 30 actively traded blue chip stocks. The S&P 500 Index is representative of domestic markets and includes the average performance of 500 widely held common stocks. The Russell 2000 Index is a popular measurement of the stock price performance of small companies. The NASDAQ is market value-weighted and represents all domestic over-the-counter stocks except those traded on exchanges and those having only one market maker. The Lehman Brothers Aggregate Bond Index is a benchmark index made up of the Lehman Brothers Government/Corporate Bond Index, Mortgage Backed Securities Index and Asset- Backed Securities Index, including securities that are of investment-grade quality or better, have at least one year to maturity and have an outstanding par value of at least $100 million.