April 15, 2009
“Even during the Great Depression, the best investment results were earned not by the people who fled stocks for the safety of bonds and cash, but by those who stepped up and bought stocks and kept buying on the way down.” – Jason Zweig, Wall Street Journal, October 7, 2008
I just returned from a mutual fund conference for investment advisors. At this conference they presented an illustration that they labeled as “Mr. Unlucky: A Case-Study in Poor Timing & the Power of Compounding”. From 1929 through 1954 the Dow Jones Industrial Average went nowhere – a 25 year time period. Mr. Unlucky invested $10,000 in the market each year beginning in 1928 and ending in 1953 for a total investment of $260,000. He reinvested dividends each year. “Despite the market going nowhere during this 25-year period, his $260,000 investment grew to $1.71 million (a 12.1% per year total return).” – Source: stockcharts.com and DSA. They went on to advise that past performance is not a guarantee of future results.
I thought this was interesting and especially relevant for those of you who are adding to your equity mutual funds within your portfolios at Schwab or through your retirement plans. Of course, Mr. Unlucky was able to cast his emotions aside, which we all know is very difficult during these tenuous times. Anyone with normal emotions might think twice about placing their hard-earned money in a stock market that does not seem to want to stop going down. Try to think of Mr. Unlucky the next time you are adding to your stock portfolio.
Over the past few months, I have been reading many articles suggesting that one of the core elements of our philosophy, “to buy and hold,” may be dead. With the benefit of retrospect, many journalists/pundits believe that this stock market slide would have been an easy one to see coming and timing the stock market would have been the surest way to avoid the slide. Over the past few weeks, I have reread parts of Roger Gibson’s book Asset Allocation – Balancing Financial Risk. I ran across a quote by 1990 Nobel Laureate William Sharpe in the Market Timing chapter of this book that I thought was especially interesting for today’s stock market:
“A manager who keeps assets in stocks at all times is like an optimistic market timer. His actions are consistent with a policy of predicting a good year every year. While such a manager may know that such predictions will be wrong roughly one year out of three, such an attitude is nonetheless likely to lead to results superior to those achieved by most market timers.
I guess our firm has always considered itself to be an optimistic firm while we try to keep the market timing to a minimum. Nevertheless, as the above quote suggests, this optimistic viewpoint can come back to bite you. We are in one of those times right now.
I have also been reading a lot about how the S&P 500 lagged their risk free alternatives like the money market or CDs over the past 10 years. The question of “Will this continue?” was posed to Christopher Davis, manager of Selected American Shares in a recent interview by Financial Advisor. He responded, “Possibly. But if you look at every ten-year period (when the S&P 500 was negative) and then look at the next ten years, the average annualized return was about 13%, and the worst was 7%. The idea that equities will underperform risk-free alternatives is a very low probability. People are paying an irrational premium for the perception of safety.”
The other investment alternative is fixed income. With the federal funds rate at 0 to 0.25%, money markets and CD rates are yielding historically low returns. Until rates begin to rise, I will keep wading through the options we have to see if there is anything else out there that emphasizes capital preservation with a higher yield.
It is difficult for me to look forward to the rest of the year and into 2010 without seeing some inflation in the picture. With the government spending and subsequently printing money, I cannot help but think inflation will rear its ugly head at some point. Therefore, over the next few months you can expect me, if I have not done so already, to add to your Treasury Inflation Protected Securities funds or TIPS (Vanguard Inflation Protected Securities and Pimco Real Return funds). They have been a bright spot during the first three months of 2009; both funds are up approximately 5% or more.
Our three pillars to investing: a long-term time horizon, diversification and a reluctance to try to time this stock market are the surest way to success in this climate. Hang in there!
Enclosed, you will find your Portfolio Holdings statement as of March 31, Portfolio Performance summaries, a quarterly Account Management Fee Statement, and a Notice Regarding Treatment of Confidential Information. Please call us should you desire the most recent copy of our Form ADV, Part II. In addition, do not forget to notify us should your investment objectives or personal financial situation change.
Sincerely,
William A. Bullock
P.S. Do we have your latest e-mail address? We are trying to put together a database of client e-mail addresses so that should I find a pertinent article or chart I could forward it to you electronically. I promise I will not inundate you with emails! If you currently receive your monthly statements from Schwab electronically, then we have your e-mail address. If you do not receive your statements electronically, please send your e-mail address to either katie@aiai.biz or bill@aiai.biz. Thank you!