Happy New Year!
Here is our motto for 2009: Let’s look forward, not back!
Calendar year 2008 was clearly one for the record books and one that we want to put behind us. As we begin 2009 it is a great time to be a patient, diversified long-term investor.
We know that this is about as easy as accomplishing all of your New Year’s Resolutions, but we are here to help you through the markets ahead. Don’t rely on us for dieting or exercise advice, but we are committed to successful, disciplined, long-term investing.
Long-term investing, even in our technology-based, internet driven society, is more than nano-seconds. At a minimum, an investment portfolio should be viewed over a 5 year or longer time period. Going in to 2009, we are entering the second year of a U.S. recession that was officially declared to have started in December 2007. The worst two recessions in recent history were in 1973 and 1981 and each lasted 16 months. Recessions driven by financial crises, like this one, have tended to be more difficult than average and may last longer. Don’t expect an immediate economic recovery in early 2009. The 2010 to 2012 time period holds promise for an economic recovery. But recognize that the stock market is a forward-looking mechanism and will likely turn up before an economic recovery. Therefore, the expected investment returns in late 2009 and the 2010 to 2012 time frame are above-average. The five-year outlook is favorable, but patience is essential.
There is good news in our relative performance in 2008. Our core index or passive management strategy performance relative to active management worked very well in 2008. The Vanguard Total Stock Market Index Fund and Vanguard 500 Index Fund ended in the top 39% and top 38%, respectively, of comparable funds as reported by Morningstar. The Vanguard Total International Stock Index Fund and the Vanguard FTSE All-World Ex US Fund both scored at the 51st percentile; 49% of funds did worse. The DFA Global Equity Fund was in the top 37% of the World Stock category. December was a very good month for our broadly diversified investment strategy with all major stock asset classes performing better than US Large Caps represented by the S&P 500.
What was the best performing stock in the S&P 500 in 2008? Family Dollar Stores, which was up 35.57%. That was over 72% better than the index. Wal-Mart was up nearly 18%. The good news is that you owned Family Dollar Stores and the other top 10 performers which had positive returns from 11% to 35%. The advantage of our core index strategy is that you will own the stocks that perform the best and they will outweigh the stocks that perform the worst because the upside is infinite (can be over 100%) but the downside is limited (can’t be below 100%). In 2008 only 27 companies, or 5% of the companies in the Standard & Poor’s 500 index, posted a positive return.
Is the grass greener on the other side of the fence? Several large and prominent stock funds did worse than the S&P 500 index, which lost 37% in 2008. Representative funds, ranked by size, include the American Funds Growth Fund of America which was down 39%, Fidelity Diversified International down 45%, Fidelity Magellan down 49% (now a One-star or lowest rated fund by Morningstar) and T. Rowe Price Growth Stock Fund down 42%. So don’t kick yourself (or us), or second-guess yourself by thinking "If only I had owned xyz fund."
In 2009 our investment management will continue to be driven by a 95% probability range as measured by standard deviation. As outlined in our December 2008 Fun Facts, this means that 95% of the time the return from an all-stock portfolio will range from minus 28% to plus 53%. Returns outside of those ranges happen 2.5% of the time on either side, so the 37% loss in the S&P 500 Index in 2008 had a probability of 2.5% of happening. Nonetheless, it did, no doubt about that. Our December 2008 Fun Facts is on our website for further reference. We are glad that our clients have been reading their Investment Policy Statements and bringing to our attention that their portfolio returns have exceeded the stated range, but once again this is a 2.5% of the time event, and hopefully not again in our lifetimes!
The financial media continues to offer a wide range of advice and commentary. Much of it is generated by the need to sell subscriptions or boost website hits. Little of it is in your best interest. If you read something of interest we are happy to discuss it with you.
We enter 2009 more committed than ever to serve your best interests first and foremost with independent, unbiased advice. We are looking very hard at our investment strategy and the process and funds that we use and will implement any improvements that can help you better achieve your personal financial goals. It is a difficult time to serve in this profession but we are 110% committed to doing our best for you.
In closing, repeat the new motto: “Let’s look forward, not back!”
As always, your trust and confidence are important to us and we appreciate the opportunity to serve you! Please contact us with any questions you have.
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