In December of 2007 I looked to articles in the Wall Street Journal and Barrons Weekly Newspaper to see what the analysts were expecting for 2008. I believe the worst prediction was the market would be down 5 – 10 percent and the highest prediction was an annual return of 6%. No one predicted that the Dow Jones US Index would fall 40% in one year or the S&P 500 would drop 37%. There have been articles published that this financial crisis could never happen in our modern era, especially since we learned from the Great Depression and Japan’s banking crisis in the 90’s.
In 2008, many hedge funds, once available only to the wealthy, closed their doors, loosing all their investors’ money, or stopped allowing withdrawals from accounts. One of the biggest financial investing scams was uncovered, loosing overall billions and for several prominent families and charities, millions. I have never understood why someone would invest in a vehicle that would not disclose its holdings or require money to be locked away for a lengthy period.
I have never been in combat or seen first hand the death and destruction afterwards but I can see how witnessing such events could leave a person with a great emotional burden. This is the best way I can describe how I feel about 2008. I have spent many sleepless nights wondering how I could make the financial punishment stop, only to awaken to a significant market rebound that a few days later retreated to make another new low. I have wondered if long term buy and hold investing is dead and if we have to invest in the stock market like one would play in Vegas. I have spent countless hours agonizing over how to deal with investments strategies that worked for years and now have been brought down by the market’s terrible losses. I carry a heavy burden knowing that each client has entrusted to me to look out for their financial well being and I take this responsibility very seriously.
After a careful review of our passive indexing approach to investing, I still see the benefits of long term index investing. While our portfolio returns varied all across the spectrum of portfolio risk, overall long term (5 years +), we still show better returns vs. risk than picking individual securities or hiring a fund manager. The question is when the market will start a recovery.
Market history shows us that after the October 1987 market crash it rebounded 14% after one year and 96% in 5 years. The stock market crash in 2001, due to the September 11th attacks lost 20% after the first year and gained 40% after 5 years. This shows us that time will heal market wounds but it will require much patience.
I am not making any predictions for 2009 other than to observe that there have been billions of dollars pumped into financial systems around the globe and this will eventually come to fruition. The incoming administration is considering additional stimulus that now seems appropriate to implement. Large institutional investors appear to be investing back into the market. We can see this by the volume of buys even as more bad economic data is published.
This Quarter I am participating in some seminars around the world. This is new to me and I am very excited to have received the invitations. Next week Kyle and I will be in Boca Raton presenting at the Inside ETF Conference. Our session is on the practical applications of Exchange Traded Funds. In late January I will be doing two workshops for the 1700 ASA pilots. This workshop will focus on the group’s JP Morgan 401K plan. In February we will be in Singapore to present at the ETF Asia Conference. Kyle and I will be doing a one day workshop on the basics if ETF’s and how to build ETF portfolio.
Exchange Traded Funds are relatively new to those markets and we expect a large turn out. On day two of the conference I will be speaking to 200+ of my Asian peers about the difference between an Exchange Traded Note and an Exchange Traded Fund. I hope that as Wiser Wealth grows, these experiences will help set me apart from other firms.
Starting out in 2009 we have several families that are themselves or have loved ones hospitalized due to illness. I pray that each of you have a speedy recovery and that good health returns for 2009.
I will close this quarterly newsletter with a quote from Ben Stein, whom I met at a TD Ameritrade Conference in 2007. This is from his article “More Lessons From the Financial Crisis.”
“I will take some comfort in knowing that even Warren Buffett’s stock fell by about 45 percent in the 2007-2008 debacle; if the father of value investing could feel he had made mistakes, and if the gurus of value investing got clobbered, then I will not torture myself too much about the horrible year and a quarter just passed.
“After all, my wife has not lost value. My dogs have not lost value. My son has gained greatly in value by getting engaged to a fabulous young woman. My friends have not lost value (but, sadly, there are fewer and fewer of them). The sunshine outside my house in Rancho Mirage, Calif., has not lost value, and every year I have left has greater value because of scarcity.”
Happy New Year!
Casey T Smith – President – Wiser Wealth Management, Inc