“Having a good investment experience is about more than returns.  What matters just as much – maybe even more –is how people feel along their financial journey.”

– David Booth, Founder and Chairman of Dimensional Fund Advisors

Each year, Dimensional Fund Advisors releases their Matrix Book highlighting investment returns from multiple markets and across various asset classes.  The book is comprised of market data; within the data lie stories which can help investors understand how markets function and what drives long-term results.  Here is a list of the most interesting stories I took away from this year’s Matrix Book.  

Markets Work

$1 invested in the S&P 500 back in 1926 turned into $11,527 by the end of 2022.  (The S&P 500 index was first introduced in 1957 and most investors would have to wait until the mid-1970s to purchase the index via a passive mutual fund; this data going back to 1926 is for illustrative purposes.)  

The “Heat Map” shown above, his shaded red and green to show whether investors were earning a positive or negative return on their invested capital.  It’s not hard to see that the majority of the map is green.  

From 1929-1943, we initially see quite a bit of red highlighting the Stock Market Crash of 1929 followed by The Great Depression.  Below are the actual annualized return figures focusing on an ill-fated investor who began their journey in 1929.  We can see that even an investor with such horrific timing was able to recover his/her original capital by 1936 and again by 1943.  Given enough time, markets work.

It Doesn't Matter What Year You Start, Just Get Invested

 Let’s say you were able to time the markets throughout history, let’s look at how much that helped your annualized returns:

If you avoided the final year of the Great Depression (1932) where the S&P 500 lost another 8.2% and invested your capital in 1933 right before the rebound, you managed to compound your wealth at a whopping 11.2% annually versus a measly 11.0% by 2022.  

1954 was the single best year for the S&P 500 on record returning 52.6% annualized; let’s say you managed to hold cash throughout 1953 and avoid the -1% return and invest it all in 1954.  Your overall annualized rate of return went from 10.7% to 10.9%, again smaller than one would think given that you entered right before the best year on record.

Market's Don't Provide an "All Clear" Sign for Investors

The bombing of Pearl Harbor on December 7, 1941, marked the US’s entry into World War II.  On September 2, 1945, Japan surrendered on the deck of the USS Missouri marking the official end of the war. Would investors have fared better if they waited until Japan’s surrender?

Turns out, 1942 was the best year to invest your cash in the S&P 500.  Waiting until 1945 when the war ended lowered your annualized return from 11.6% to 11.2% by the end of 2022.  Turns out markets don’t wait for problems such as a World War to fix themselves; instead, they rapidly adjust prices and reward investors who can commit.

Cash and Short-term Bonds can be Risky

Cash and short-term bonds may seem risk-free if looking at price fluctuations alone.  We can see that investing in short-term Treasury Bills turned $1 into $22 since 1926. 2022 was a harsh reminder for many that there is a dimension of risk to markets called inflation. How safe do 1-Month T-Bills look after we account for inflation as measured by CPI over that time?

This is the same asset and return chart simply adjusted for inflation over time.  This graphic demonstrates that individuals investing their capital for future consumption in retirement may want to think twice about which assets are risky to own over the long-term.

Global Markets are Always Evolving

The United States comprises 59% of the entire world stock market at the end of 2022:

End of 2022

End of 2010

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This image above is from the 2010 DFA Matrix Book and illustrates that the US was 40% of the world stock market just 12 years ago.  

Think you should just own the US stock market?  Below is a “Quilt Chart” showing annualized performance for Developed Global Markets:

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It's not hard to see that the randomness of the colored boxes indicates no patterns of returns from one year to the next. There are reasons to favor the US in your portfolio; however, the evidence clearly shows that investors should include at least some portion of the global stock market in their portfolios to reduce country specific risks.  

Summary

·       Capital Markets work over time

·       Timing markets is likely to do more harm than good

·       Safety of principal comes at a cost over time

·       Owning a portion of the global stock market assures that you own the winners every year