Letter to Our Clients - November 2008
Our account balances have dropped dramatically. The markets are in a panic. Should we be?
I remind you of the expression, which we now believe is from Warren Buffett, that “The Stock Market is a device for transferring money from the impatient to the patient.”
Being patient and disciplined in times like these is very difficult. In fact, I describe it as “hard work.” We work hard to make the money we earn to pay for the goods and services we need, and the entertainment and luxuries we enjoy. What is not spent is saved for reserves, and what is not needed for reserve can be invested. There have been times when investing did not seem like hard work. During most of the 80’s and 90’s it seemed easy to make money by throwing it into the stock market. It is no longer easy. It is hard work to stay patient so that market cycles can run their course. It is hard work to stay disciplined to stick with the long-term strategy that was developed to help you achieve your financial objectives.
Let me give you some reasons to remain confident in your long-term strategies.
- A company called Dalbar did research which showed that, for the 20 years 1987 to 2006, the S&P 500 (an unmanaged index not available for investing) averaged 11.8% per year. During that same time period, the average individual stock market investor earned less than 5%. Why? Because most investors buy when they feel comfortable with the market, and sell when they grow fearful.
- Ned Davis Research looked at the 30 years, 1978 to 2007. Their research concluded that the S&P 500 averaged 9.6% per year for those 30 years. However, their research indicated that:
Missing the 10 best trading days reduced annual returns to 7.65% Missing the 25 best trading days reduced annual returns to 5.57%
Let me restate that. Over a 30 year period (imagine how many trading days that involves!), just missing the 25 days that the stock market had its highest percentage returns, resulted in a reduced annualized return of over 4% a year. This helps explain how investors studied in # 1 above could so significantly underperform the averages. No one can predict when the market will jump up. If you miss the big up days, by waiting until the market has stabilized and you feel comfortable, you will miss a major part of the potential investment returns available to you. This in turn means you will experience greater long-term risk of underperformance than if you stayed true to your investment strategy.
- The American Funds has a wonderful education brochure. In this brochure one hypothetical investor puts $10,000 into the market every year at the worst possible day of the year – when the stock market was at its high for the year. Another hypothetical investor is incredibly good or lucky – they invest every year at the market’s low for that year. For the 20 years 1988 to 2007, the investor with the worst possible timing has averaged 10.3% a year. The investor with the best possible timing has averaged – 11.4% a year. About 1% a year over a 20-year period, between best possible timing and worst possible timing. This example does not represent any specific investment. Actual results will vary. Past performance is not a guarantee of future results.
- There is no way to predict how long or how much deeper this Bear Market will last. However, in a recent Oregonian, Citi Investment Research strategist Tobias Levkovich is quoted as stating that “the average one-year rally following a bear market bottom is 42.5%, suggesting that bailing out of equities at this juncture does not make much sense.”
- Remember what I said in my last letter. I explained that your investment account is not like a bucket with a leak from which dollars are draining out. You own a bucket full of stocks, bonds and other financial assets, and their asset values are falling. Our homes have been dropping in value also. Do we worry that the home value will go to zero? No, because we can see and touch the real asset. Will your investment account go to zero? Only if all the companies represented by the stock and bonds go bankrupt, and that will not happen short of a global nuclear war, asteroid wiping out civilization, or some similar cataclysmic event. We may indeed have a recession, perhaps a depression, but even coming out of the 1930’s, corporate America survived. As a result, there were investors who made money, and investors who lost money. This pattern continues today, and will continue as long as we have non-government companies willing to take risk and innovate in order to sell goods and services at a profit.
- Why is this happening? The Wall Street Journal published an article on November 20th, discussing the technical “dislocations” in the markets. The author, Andy Kessler, believes these dislocations are exaggerating the normal volatility that occurs in “normal” down markets. It is his opinion the pressures of these technical factors will not work themselves through the system until February. He concludes his article by saying: “Remember, you can only ignore the stock market for so long. Once everyone thinks it can only go down... it might go up.”
Please remember that all market cycles come to an end. We have had many years of investing profit. We are having our second bear market this decade, but this one will end as well. My belief is that we should keep our current investment strategy until we are again profitable, and in fact feeling comfortable that the market is “more stable.” If we remember 2008 as a time when we wished we had been invested differently, then that future time is when we should adjust our long-term strategy.
However, if you remain worried, if you are losing sleep or feeling that the stress of your investment accounts is having a negative affect on you, then please call me. My job is to give you information and guidance, not to tell you what to do. I will help you adjust however you think is appropriate for you.
In the final analysis, we live in a wonderful country, and most of us still have prosperity that would be the envy of most of the world and 99.9% of all humans who have ever lived. Let us take time to be thankful for all that we do have and enjoy.
All of us at Advanced Wealth Management hope you have a wonderful Thanksgiving Holiday.
Robert K. Haley, JD, CFP®, AIF®