We’re sure it isn’t news to you that we’re in a global financial crisis. What we’d like to do is distill some signal out of all the noise.
One thing is very clear: The current global decline is major. It will rank among the very worst. Today, it still isn’t as bad as 1973–1974 or 2000–2002, but it could be before it is over. We simply don’t know. But after talking with clients, we thought we could offer some useful observations.
The first is that we are in this with you. Most of my personal wealth is invested in the markets through the same investment strategies we employ at AssetBuilder. Ditto Scott. We understand the discomfort you are feeling as markets react to one headline after another. We deeply appreciate the confidence you have expressed in AssetBuilder by making us your investment advisor.
The second is that we’re in a period of extreme behavior. Jim Cramer says, “Sell stocks if you need the money within the next 5 years”. At the other extreme the Oracle of Omaha, Warren Buffett, has been committing billions with recent investments in GE, Goldman Sachs, Constellation Energy and others.
Our investment strategy is closer to Buffett than Cramer. We call our strategy “Main Street vs. Wall Street.” We believe investing is a process–over–time, not a decision for a moment–in–time. Like Buffett, we believe the best holding period is “forever.” Because of that, our investment strategy is based on efficient asset class index funds, high diversification, and a tilt toward value stocks and small cap stocks. We take as little risk as possible in the fixed income markets, saving our risk budget for the higher long term payoff of equities. Our shorter term fixed income positions mean you have more low risk access to cash than you would have in portfolios that take longer term fixed income positions.
A third observation is that this market is not unique. We have had periods of excessive credit before this. Recall Michael Milken and the junk bond era. Recall risky lending to REITs in the late 70s. Recall the S&L lending binge of the early 80s.
Like today’s market, what they all share is a sense of doom.
So let’s ask a crucial question. Could you have escaped the misery with clever selling? Answer: Not likely. Good market timing requires two near–perfect decisions. One is when to sell. The other is when to buy. In our experience, the few that get the first decision right never make it to the second decision and miss the recovery.
The risk of not doing so is highlighted in the tables below. They show the growth of a dollar’s investment from January 1980 through August 2008 for four broad indices. You would have realized about half the value if you missed the six best individual months in that period. Keep in mind, six months represents 1.8 percent of the period we are looking at.
|1/1980 — 8/2008||Growth of $1
|Growth of $1
(without best 6 months)
|S&P 500 TR||27.11||15.44|
|MSCI EAFE TR||20.34||11.51|
|Russell 2000 Val TR||41.42||22.04|
|DJ Wilshire REIT TR||30.28||16.00|
Significant market uncertainty has put “risk” in a personal context … one that every investor has taken measure of. Please review my Capital Gains article on the website; “How to Survive the Market Ride?”
I hope this perspective on the current situation is helpful, but please contact us if you would like additional help. We are here for you!
Kennon S. Grose
President and CEO