Buying low and selling high is a focus of every investment decision for 360 Wealth Resources clients. We focus on it in your asset allocation and Dimensional Funds focuses on it in every fund we allocate to. Why is this the critical decision? Because of an investment law that is always in place called “Reversion to the Mean”, also called regression to the mean.
There are two opportunities being pursued on your behalf right now, and they are based on the difference in the current rate of return and the known “expected return”. Value stocks offer a higher expected return over the broader stock market. This is not the case now but will be the case sooner or later. . The following 5 year averages illuminate a classic buy low and stay there opportunity. The Domestic Opportunity is reflected here.
- S&P 500 Growth @ 5 year avg = 13.98
- S&P 500 Value @ 5 Year avg = 8.67% (-5.31%)
International Diversification Opportunity…International Stocks should perform at a similar return level to US Stocks…indeed in the period 1999 to 2009 International holding dramatically out performed US holdings and have dramatically not done so since, creating an obvious opportunity.
- S&P 500 @ 5 Year avg = 11.52%
- MSCI EAFE @ 5 Year avg = 2.53% (-8.99%)
- EAFE World x US @ 5 year avg = 3.04% (-8.48%)
- MSCI Emerging Markets @ 5 year avg = 4.02% (-7.50%)
Asset allocation to Stocks, Bonds, Cash and Real Estate requires a process that also includes tax, volatility and income considerations specific to you. Please feel free to drop me a note if you have any questions or items to clarify about how the regression to the mean opportunity is being captured for you.