Note from Our CIO: A Five-Year Investment Review

In anticipation of receiving your quarterly reports for the first quarter of 2016, you might be wondering how your investments have been performing and what the markets have been doing. The following table lists a representative sample of our investments that we use for most of the major asset classes. We use several mutual fund managers, but for ease of presentation I am focusing only on Dimensional Fund Advisors. The table provides the annualized performance for the five-year period ending March 31, 2016.

Table 1. Five-Year Annualized Performance Through March 31, 2016

United States

The DFA US Sustainable Core 1 fund invests in over 2,300 publicly traded companies in the United States. Our expectation is that this fund will earn 10.5% per year on average. So for the past five years, it has been nearly meeting our expectation at 10.4% before custodial or Abacus fees.

Small and Inexpensive Companies

The DFA Target Value fund invests in approximately 1,500 of the smaller and relatively cheaper (“value”) companies in the United States. Our expectation is that this fund will earn more than the overall U.S. market as represented by the DFA US Sustainable Core 1 fund. The extra return we expect is called the “premium,” and we expect it because these companies are riskier to invest in. Therefore, the performance of 8.0% per year on average for the past five years means that the premium has not actualized over the past five years. This is not uncommon. If we look at the history of smaller and cheaper companies, they have had various extended periods of underperformance but have been followed by extensive periods of over-performance. This is one of those periods where we believe patience will be well-rewarded.

Developed International and Emerging Markets

Generally, we expect about the same—roughly 10.5% performance over time from companies in developed international markets and emerging markets as we do from the United States. Clearly, international and emerging markets—turning in five-year performances of 2.1% and -3.5% per year, respectively—have been disappointing. However, it is not uncommon for the U.S. to have returns that are just as low over five-year periods. And there have been plenty of periods in the past where international and emerging markets have performed much better than the U.S. This is the dirty secret of diversification. Investments do not all move up and down at the same time—and that is a good thing. We want that to be the case.

Real Estate

We expect about 9–10% from our real estate investment trusts (REITs), which is closely in line with the past five years.

Bonds

When we lend money to high-quality companies and governments, generally for relatively short periods of time (one to five years), we expect stability in the value of the investment. We therefore cannot expect too much in return—namely about 3.5%. We use five bond funds currently, and collectively they have performed close to our expectations over the past five years.

Client Example

Let’s look at an actual client who is invested 55% in stocks and real estate, and 45% in bonds. Our return expectation for the portfolio is 6.1% with 3.0% inflation. Stated another way—and the most important way—our return expectation is 3.1% (6.1% minus 3.0%) over inflation. For instance, if inflation is 20%, then we expect the portfolio to earn 23.1%, while if inflation is 0%, then we expect the portfolio to earn only 3.1%. This 3.1% over inflation is the return assumption in the client’s lifetime plan. It is what they need to earn, and all they need to earn to make their plan work and achieve all their goals. It is therefore the only benchmark that matters for them.

We live in a world with inflation. The cost of the things we want goes up over time. When inflation is higher than average, returns are generally higher than average; conversely, when inflation is lower than average, returns are generally lower than average. What matters most in our investment experience is our return relative to inflation.

Over the past five years, the client’s actual return was 4.3% in the face of actual inflation of 1.2% per year. In other words, the client earned 3.1% over inflation annualized for the past five years. Let’s summarize this with a table:

Table 2. Five-Year Performance of a 55/45 Portfolio

Note: It is somewhat dumb luck that I happened to pick a client whose actual and expected returns over inflation are nearly identical! In general, the actual return will drift above the expected return for a while and then below it for a while, and so on with the ups and downs of the markets. We just happened to catch this client right at a point in time when their actual return crossed over the expected return.

We are all investing to cover a lifetime of goals, which predominantly is the consumption of goods and services from thousands of companies around the world over multiple decades. To best match your money to these goals, your advisor will recommend a mix of stocks versus bonds, and that mix will have an associated expected return over inflation, which serves as your target or benchmark return for the rest of your life or until your goals or circumstances change. Your Abacus advisor looks forward to making sure you know what we expect from your portfolio relative to inflation and helping you compare that expectation with your actual performance.

Abacus Wealth Partners is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Actual performance of client portfolios may differ materially due to the timing related to additional client deposits or withdrawals and the actual deployment and investment of a client portfolio, the reinvestment of dividends, the length of time various positions are held, the client’s objectives and restrictions, and fees and expenses incurred by any specific individual portfolio.

Disclosure: Abacus Wealth Partners, LLC (Abacus) is an SEC registered investment adviser with its principal place of business in the State of California. Abacus may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. This brochure is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by Abacus with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Abacus, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).

This is not an offer to sell any type of security, and there is no investment currently available through Abacus, which would allow someone to invest in JUMO World. Abacus Wealth Partners is the General Partner of Abacus Impact Fund 2013, LP, a fund of funds that ultimately has an interest in JUMO World. The information presented in the “Impact Investment Profile” is to provide additional qualitative reporting to Abacus clients who own Abacus Impact Fund 2013, LP, as well as to help educate Abacus clients about impact investing.

This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell this security. This newsletter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Information related to the firm’s performance is based on pure model portfolios only and is net of fees. Certain clients may have holdings that deviate from the model and as such individual client performance may be different than the results presented herein.

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