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Creative Planning

M a r k e t d i v e rg e n c e
Peter Mallouk, J.D., MBA, CFP Chief Investment Officer www.thinkingbeyond.com

Wealth management UPDATE august 25th, 2013

The first two-thirds of 2013 has presented an interesting puzzle for investors. While the last few weeks have been particularly choppy, overall US stocks have had a great year, outperforming every major asset class (see the blue line above of the Vanguard Large Cap Index). For most of our clients, US stocks represent the largest portion of their stock allocation, serving as the portfolio anchor. At the same time, international stocks are positive (see the red line above of the Vanguard International Index) but are showing less than half the gains posted by large US stocks. The emerging markets index has posted the worst year-todate performance of the major indexes, down 14.85% (see the orange line above of the Vanguard Emerging Markets Index). Various asset classes behave differently at different times. In fact, that is the whole point of owning various asset classes. What is particularly different about the start of 2013 is the gap with which large US stocks is outperforming international stocks. Since that is the case, why own international positions at all? First, the economy is global. More than half of the stock market capitalization in the world is overseas. A global portfolio reflects the reality that companies exist everywhere. Second, owning international stocks provides diversification. Much in the same way it makes sense for a prudent investor to own multiple stocks, it makes sense for the investor to own multiple markets. Finally, it is impossible to ever know which market will do better over any given year, but both ultimately end up at a similar destination. By taking different paths, most of the time owning both reduces the volatility.
3400 College Boulevard Leawood, KS 66211 913-338-2727 Fax 913-338-4507 Website: www.thinkingbeyond.com E-mail: cpi@thinkingbeyond.com

Creative Planning

M a r k e t d i v e rg e n c e
On occasion, one market will substantially outperform the other as international did in 2009 or the US has done so far in 2013. For the most part, however, they take slightly different paths to the same place. Over the last 20 years, the S&P 500 (large cap US stocks) has outperformed 9 times and the MSCI EAFE (international index of developed stock markets) has outperformed 11 times. We remain committed to a global approach to investing, and continue to add to international positions. Over time, we expect the same outcome that has always happened, which is the return to equilibrium. Emerging markets, a very aggressive subset of the international markets, is currently the worst performing major asset class. The wild swings that accompany the emerging markets position are normal and to be expected. Over the last 10 years alone, the emerging markets index has been the best or worst performing market 9 out of 10 times. Along the way, the ride has been wild. From 2003 to 2007 the index returned between 26% and 56% each year. In 2008 it was down 53%, up 79% in 2009, up 19% in 2010, down 18% in 2011, and up nearly 19% in 2012. Over the last 20 years, emerging markets have rewarded the investor willing to hold such a volatile position as it has been the best overall performer over the long run. Last year, Mitchell Conover of the University of Richmond, Gerald Jensen of the University of Northern Illinois, and Robert Johnson of Creighton University published a paper with their findings that the benefits of investing in emerging markets, while already long-held to be a positive, has even been underestimated, saying our findings indicate that emerging markets allow investors to achieve lower risk, higher returns, and expanded risk/return possibilities, especially when world investors need diversification most. In other words, owning an emerging markets position in an overall portfolio generally makes the overall portfolio less risky, even though the emerging markets position itself is very volatile, all the while likely improving long term performance. Well, you might say, that is all great, but why not exit emerging markets and wait for it to stabilize before re-entering? The first reason is it is impossible to know when it will turn. The second reason is when it turns, it tends to do a 180 very fast and rocket like a bullet, often following a 10% to 15% drop with a 25% swing in a very short period of time. Because emerging markets are so volatile, they only have a place in the portfolios of our clients who have a long time horizon for that portion of their portfolio. With a current dividend yield of over 4%, there is plenty of room for upside for the long run investor. In other words, this is a position that belongs in the patient part of the portfolio. Creative has always been committed to a global, multi-asset class approach to investing, generally summed up spreading the eggs among various baskets. We own both domestic and international positions as well as riskier positions such as small US stocks and emerging markets stocks, which have rewarded investors with higher returns than large company US stocks
3400 College Boulevard Leawood, KS 66211 913-338-2727 Fax 913-338-4507 Website: www.thinkingbeyond.com E-mail: cpi@thinkingbeyond.com

Wealth management UPDATE august 25th, 2013

Creative Planning

M a r k e t d i v e rg e n c e
over the long run. US large cap stocks outperform everything else on rare occasion and when it has happened, it has never been sustained. An indication of how much room there is for the gap to close is reflected by the dividends collected from US stocks compared to international stocks. Currently US stocks have a dividend yield of 1.9% and international stocks have a dividend yield of 4.9%. Wealth management UPDATE august 25th, 2013 The Callan Chart on the following page provides a simple but excellent overview of how various markets have behaved in any given year. This provides an excellent visual representation as to the benefits of owning multiple asset classes and how they perform differently at different times. There are several interesting takeaways: First, the varying performance of international and domestic stocks, second the extreme volatility of emerging markets, and third and most importantly, the randomness of returns. Generally, the more volatile the asset class, such as emerging markets, the higher the average return over time. It is precisely for these reasons that we have always been committed to a global multi-asset class approach, one that ultimately rewards the diversified investor.

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Please visit our website at www.thinkingbeyond.com. Thank you for the introductions to your friends and colleagues, and for your continued confidence. Our clients are always welcome to forward our articles to family, friends and colleagues. However, it has come to our attention that some of our articles have been plagiarized. Please note: the articles are the property of Creative Planning, Inc. Reproduction is prohibited.

3400 College Boulevard Leawood, KS 66211 913-338-2727 Fax 913-338-4507 Website: www.thinkingbeyond.com E-mail: cpi@thinkingbeyond.com

The Callan Periodic Table of Investment Returns


Annual Returns for Key Indices (19932012) Ranked in Order of Performance
1993
MSCI Emerging Markets 74.84% MSCI EAFE 32.57% Russell 2000 Value 23.77% Russell 2000 18.88% S&P 500 Value 18.61% Russell 2000 Growth 13.37% S&P 500 10.08% Barclays Agg 9.75% S&P 500 Growth 1.68%

1994
MSCI EAFE 7.78% S&P 500 Growth 3.13% S&P 500 1.32% S&P 500 Value -0.64% Russell 2000 Value -1.54% Russell 2000 -1.82% Russell 2000 Growth -2.43% Barclays Agg -2.92% MSCI Emerging Markets -7.32%

1995
S&P 500 Growth 38.13% S&P 500 37.58% S&P 500 Value 36.99% Russell 2000 Growth 31.04% Russell 2000 28.45% Russell 2000 Value 25.75% Barclays Agg 18.46% MSCI EAFE 11.21% MSCI Emerging Markets -5.21%

1996
S&P 500 Growth 23.97% S&P 500 22.96% S&P 500 Value 22.00% Russell 2000 Value 21.37% Russell 2000 16.49% Russell 2000 Growth 11.26% MSCI EAFE 6.05% MSCI Emerging Markets 6.03% Barclays Agg 3.64%

1997
S&P 500 Growth 36.52% S&P 500 33.36% Russell 2000 Value 31.78% S&P 500 Value 29.98% Russell 2000 22.36% Russell 2000 Growth 12.95% Barclays Agg 9.64% MSCI EAFE 1.78% MSCI Emerging Markets -11.59%

1998
S&P 500 Growth 42.16% S&P 500 28.58% MSCI EAFE 20.00% S&P 500 Value 14.69% Barclays Agg 8.70% Russell 2000 Growth 1.23% Russell 2000 -2.55% Russell 2000 Value -6.45% MSCI Emerging Markets -25.34%

1999
MSCI Emerging Markets 66.42% Russell 2000 Growth 43.09% S&P 500 Growth 28.24% MSCI EAFE 26.96% Russell 2000 21.26% S&P 500 21.04% S&P 500 Value 12.73% Barclays Agg -0.82% Russell 2000 Value -1.49%

2000
Russell 2000 Value 22.83% Barclays Agg 11.63% S&P 500 Value 6.08% Russell 2000 -3.02% S&P 500 -9.11% MSCI EAFE -14.17% S&P 500 Growth -22.08% Russell 2000 Growth -22.43% MSCI Emerging Markets -30.61%

2001
Russell 2000 Value 14.02% Barclays Agg 8.43% Russell 2000 2.49% MSCI Emerging Markets -2.37% Russell 2000 Growth -9.23% S&P 500 Value -11.71% S&P 500 -11.89% S&P 500 Growth -12.73% MSCI EAFE -21.44%

2002
Barclays Agg 10.26% MSCI Emerging Markets -6.00% Russell 2000 Value -11.43% MSCI EAFE -15.94% Russell 2000 -20.48% S&P 500 Value -20.85% S&P 500 -22.10% S&P 500 Growth -23.59% Russell 2000 Growth -30.26%

2003
MSCI Emerging Markets 56.28% Russell 2000 Growth 48.54% Russell 2000 47.25% Russell 2000 Value 46.03% MSCI EAFE 38.59% S&P 500 Value 31.79% S&P 500 28.68% S&P 500 Growth 25.66% Barclays Agg 4.10%

2004
MSCI Emerging Markets 25.95% Russell 2000 Value 22.25% MSCI EAFE 20.25% Russell 2000 18.33% S&P 500 Value 15.71% Russell 2000 Growth 14.31% S&P 500 10.88% S&P 500 Growth 6.13% Barclays Agg 4.34%

2005
MSCI Emerging Markets 34.54% MSCI EAFE 13.54% S&P 500 Value 5.82% S&P 500 4.91% Russell 2000 Value 4.71% Russell 2000 4.55% Russell 2000 Growth 4.15% S&P 500 Growth 4.00% Barclays Agg 2.43%

2006
MSCI Emerging Markets 32.59% MSCI EAFE 26.34% Russell 2000 Value 23.48% S&P 500 Value 20.81% Russell 2000 18.37% S&P 500 15.79% Russell 2000 Growth 13.35% S&P 500 Growth 11.01% Barclays Agg 4.33%

2007
MSCI Emerging Markets 39.78% MSCI EAFE 11.17% S&P 500 Growth 9.13% Russell 2000 Growth 7.05% Barclays Agg 6.97% S&P 500 5.49% S&P 500 Value 1.99% Russell 2000 -1.57% Russell 2000 Value -9.78%

2008
Barclays Agg 5.24% Russell 2000 Value -28.92% Russell 2000 -33.79% S&P 500 Growth -34.92% S&P 500 -37.00% Russell 2000 Growth -38.54% S&P 500 Value -39.22% MSCI EAFE -43.38% MSCI Emerging Markets -53.18%

2009
MSCI Emerging Markets 79.02% Russell 2000 Growth 34.47% MSCI EAFE 31.78% S&P 500 Growth 31.57% Russell 2000 27.17% S&P 500 26.47% S&P 500 Value 21.17% Russell 2000 Value 20.58% Barclays Agg 5.93%

2010
Russell 2000 Growth 29.09% Russell 2000 26.85% Russell 2000 Value 24.50% MSCI Emerging Markets 19.20% S&P 500 Value 15.10% S&P 500 15.06% S&P 500 Growth 15.05% MSCI EAFE 7.75% Barclays Agg 6.54%

2011
Barclays Agg 7.84% S&P 500 Growth 4.65% S&P 500 2.11% S&P 500 Value -0.48% Russell 2000 Growth -2.91% Russell 2000 -4.18% Russell 2000 Value -5.50% MSCI EAFE -12.14% MSCI Emerging Markets -18.17%

2012
MSCI Emerging Markets 18.63% Russell 2000 Value 18.05% S&P 500 Value 17.68% MSCI EAFE 17.32% Russell 2000 16.35% S&P 500 16.00% S&P 500 Growth 14.61% Russell 2000 Growth 14.59% Barclays Agg 4.21%

S&P 500 measures the performance of large capitalization U.S. stocks. The S&P 500 is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ. The weightings make each companys influence on the Index performance directly proportional to that companys market value. S&P 500 Growth and S&P 500 Value measure the performance of the growth and value styles of investing in large cap U.S. stocks. The indices are constructed by dividing the market capitalization of the S&P 500 Index into Growth and Value indices, using style factors to make the assignment. The Value Index contains those S&P 500 securities with a greater-than-average value orientation, while the Growth Index contains those securities with a greater-thanaverage growth orientation. The indices are market-capitalization-weighted. The constituent securities are not mutually exclusive. Russell 2000 measures the performance of small capitalization U.S. stocks. The Russell 2000 is a market-value-weighted index of the 2,000 smallest stocks in the broad-market Russell 3000 Index. These securities are traded on the NYSE, AMEX, and NASDAQ. Russell 2000 Value and Russell 2000 Growth measure the performance of the growth and value styles of investing in small cap U.S. stocks. The indices are constructed by dividing the market capitalization of the Russell 2000 Index into Growth and Value indices, using style factors to make the assignment. The Value Index contains those Russell 2000 securities with a greater-than-average value orientation, while the Growth Index contains those securities with a greater-than-average growth orientation. Securities in the Value Index generally have lower price-to-book and price-earnings ratios than those in the Growth Index. The indices are market-capitalization-weighted. The constituent securities are not mutually exclusive. MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East. MSCI Emerging Markets is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 21 emerging countries around the world. Barclays Aggregate Bond Index (formerly the Lehman Brothers Aggregate Bond Index) includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.

Knowledge. Experience. Integrity.

2013 Callan Associates Inc.

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