Who would have predicted what occurred in the financial markets during 2008 and early 2009? Who could have predicted the huge losses in the stock markets worldwide, financial crisis and major institutions going bankrupt or merging into others?
No one could have predicted these events, as no one can predict the future. Which is why one of our investment principles is based on the concept that “we cannot predict the future.” This may seem startling to non-clients, but give it some thought. It makes sense, doesn’t it?
Much of Wall Street is based on claiming they can pick the best stocks, which countries or sectors to allocate into and out of, etc. To do this correctly over a long period of time, you have to be able to predict the future. Do you know of anyone who can do that correctly, for years in a row?
So what has occurred to the financial markets in past year? It is utterly amazing, and again, something that no one could have predicted. The S & P 500 is up 71% from its low on 3/9/09 to today, going from 667 to approximately 1,140 today. The Global Dow (made up of large companies throughout the world), has risen 74% from it’s low on 3/9/09 to today.
What is to be learned from this information? It reinforces our philosophy and advice that we provided to our clients, that markets would rebound, we just did not know when and by how much. We did know that if you were to wait until clear signs of a financial recovery or stability were apparent, you would miss a lot of the market recovery. Signs are now appearing in the statistics that the government and businesses are releasing, such as retail sales and unemployment claims, that the worst of the financial crisis is behind us.
We believe that our financial principles have survived the test of the past few years. Being well diversified on a global basis and having a very significant international allocation of equities was beneficial. Our strategy of not using active money managers was proper, as most active managers and mutual funds underperformed the markets, and those few that did could not have been identified in advance. Regardless of what Wall Street says (“this is a stock pickers market”), if you cannot predict the future, then picking stocks in this manner is a losers game, in the long run.
We are more passionate than ever that our investment providers are doing the right thing. They are focused, as are we, on providing the lowest cost investment products, as that is something that we can control, without sacrificing investment performance. We know that global diversification means not just having international mutual funds, but having those funds diversified all around the world in a prudent and disciplined manner. It means not having 50% of your international fund be in Europe or Japan, as that is not truly “diversification,” that is actually a huge bet (prediction?) on one part of the world.
We are also very satisfied that our conservatism with regards to fixed income investing has proven to be the correct strategy. By not holding corporate bonds, junk bonds, certain municipal bonds or long term fixed income investments, our clients did not incur the huge losses which many investors did in 2008. Our clients are also well protected for the eventual rise in interest rates (when will that begin?), as their portfolios are not full of bond mutual funds, which will be the “next big mistake” that the media will be writing about some time in the future. When interest rates rise (not if, but when), those bond mutual funds will decline significantly in value. Our strategy of holding very high quality individual bonds and CDs is proper now, and it will be even more evident that is it correct over future years.
In summary, 2008 was very painful. Most of 2009 was very rewarding, for those who were disciplined and adhered to their strategy. We learned throughout the past 2 years that the foundations of our investment philosophies were correct and will withstand the test of time, during both good and bad times.
If you have questions or thoughts about any of these items, please email me at email@example.com.
Source for investment statistics: WSJ.com, as of 3/8/10.