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Nov 14, 2008 12:59 pm

So thanks to having the financial porn on in my office, I have come across a good talking point.


They are flashing across the screen, "Stocks tumble on anniversary of the Dow's first close above 1000 in 1972", or something to that effect.


Just going on straight numbers, here's where we are.  Exactly 36 years ago, to the day, the Dow closed above 1000.  Today, we're at 8500.


If you talk to your typical client aged 60 years, you are probably planning for a retirement that will last until he is in his mid-90's (unless he's wheezing on an oxygen machine).  Hmmm...oddly enough, that's about 36 years from now.


So, given the 40% drop that puts us at 8500, there was also a 45% drop in the early 2000's.  Don't forget about the Orange County crisis that saw some bonds fall 30% or more, if they didn't default.  There was also the S&L crisis, don't know the numbers off hand, but it happened.  1987's bear market was down 33% peak to trough.  1980-82's drop was 27%.  Lastly, 1973-74, the market was was down 48%.


So despite those fantastic returns, the market, TODAY on this 36th anniversary, is up 750% or 6.12% per year. 


Of course, some will say this time feels worse.  It very well could be.  But when you look back 36 years from now for that 60 year old client today, what will you and him remember about this crap?


I'm willing to bet, if the client sells out here or at 9500 or at 7000 or wherever, he'll remember this bear market like it's been burned into memory as opposed to a "little" bump along the way had he stayed invested.


Holy smokes, what an epiphany.

Nov 14, 2008 1:14 pm
Good stuff
Thank you for sharing that!
 
 
Nov 14, 2008 1:14 pm

"So despite those fantastic returns, the market, TODAY on this 36th anniversary, is up 750% or 20% per year."

 
Snags, try your math again my friend.  20% per year would have put the Dow at 8500 by 1984.
 
36 years at 20% would have put the Dow at about 700,000 today.
 
The return has been more like 6.5% over the past 36 years.  Should have bought a bond. 
 
Actually, I ran a hypo on ICA versus the S&P over that time frame, and ICA beat it by like 3%points over those 36 years.  So much for indexing....
Nov 14, 2008 1:18 pm

I know, I just caught that. 

Nov 14, 2008 1:28 pm

Actually, it starts to make you question what you are telling clients.



I would be hard-pressed to meet ANYONE (individual investor) investing in typical securities, that has done any better than 8% over extended periods of time.
 
But you know who has?  My clients with all their stock in their employer.  Pisses me off.  They have actually made 17% per year for the past 20 years.  EVEN including October, they are up 9% that past 10 years.  They have completely wiped the S&P and Dow from their radar over ANY time frame.
 
Good for them, but it makes my arguments to them about diversification even TOUGHER!  "Yeah, so you, I know you've made, like, 20% the past 20 years, but you COULD have made like 5% with good diversification.  Even better, you could be EVEN over the past 10!"
Nov 14, 2008 1:30 pm
iceco1d:

B24 - I'm sure you KNOW that your post was going to force me to respond 

 

 
Two points regarding "so much for indexing."
 
1.  ICA invests in securities that aren't included in the S&P 500 over that time period.  That makes your comparison unfair.  I know you know that...but in addition,
 
2.  The 70s & 80s were a very different time than the 90s, and the 00s.  I know you know this too, but maybe not in the way it affects indexing.  The case for indexing can only be made for highly efficient markets - where trading volume and information flow freely to the masses of market participants.  The 1970s and 1980s did NOT have this kind of efficiency - and therefore, active management during those decades would have likely been capable of consistently outperforming the index. 
 
I hope that makes sense...
 
Oh yes, wait, I forgot to add point #3.  The S&P 500 is a garbage index.  I can't forget to include that!
 
I know that.  It was really more of a joke.  I was wondering who would jump on it.... I should have figured it would be you!
 
Although I must admit, I still feel that active managers that have a little more lattitude than the indexes can add value, especially during volatile or down markets.  And I think you MADE my point.  Most active managers (and I am just using LC growth/blend/value as example) do NOT have to stick to the indexes, which is why they can add value.  What I see a firm like American Funds do well is use the better companies from the indexes, and exclude the bad ones, then find other opportunities outside of it.  Why do you have to try to compete with an index anyway?  (sidenote: I have never sold ICA, not even once)
Why not focus on absolute returns in any market?  I am not at all impressed that Bill Miller beat the S&P for 14 years.  Did you ever look at his numbers?  Last I checked (long time ago), his margin of victory was rather small.  So when the S&P is down 22%, you're down 20%?  And you celebrate?  I have no interest in that.  I am interested in being up 4% when the market is down 4%, and up 12% when the market is up 20%.  You still get to your 8% return, but with far less volatility and uncertainty.
 
Now, the current market is truly an anomoly as far as history is concerned, but I would much rather be in Capital Income Builder, which rarely ever recorded a down year, than in a 100% equity index-type fund.  Now, you can argue about asset allocation and everything, but I am just more the core/satallite philosophy.  Let the great managers decide where to find the best investments.  Let them decide how to mix the assets (i.e. "Global Allocation" funds, i.e. Capital Income Builder, Blackrock Global, First Eagle Global, etc.).  Now, the problem here lies in the fact that you have to actually PICK those good managers, which is NOT always based on returns.  Most of the best managers do not consistently beat some arbitrary benchmark.  They manage to total returns over time, not short term benchmarks.  Then add some satellite investments to add alpha and diversification (small cap, commodities, R/E, etc.).
 
Wow, I better just stop now.  ICE, I'm ready for the big SMACKDOWN! (I actually love debating this stuff, because I usually learn something valuable from it)
Nov 14, 2008 1:52 pm

B24,

 
Regarding absolute return, I too have become a huge fan of that in portfolios.  I use JP Morgan's Highbridge Statistical (HSKAX).
 
I too like Blackrock Global Allocation, Ivy Asset Strategy, Transamerica Multi-Manager, and UBS Dynamic Alpha (available in Pru's VA to me).
 
Regarding your clients' company stock, I'm sure you do this, but you have to get them on board to realize that it is PART of their diversification.  Say, this is the part we expect higher returns, so we can take less risk with other portions.  I know they might not get it, but it's just a slice of the pie.
Nov 14, 2008 2:59 pm
 
2.  The 70s & 80s were a very different time than the 90s, and the 00s.  I know you know this too, but maybe not in the way it affects indexing.  The case for indexing can only be made for highly efficient markets - where trading volume and information flow freely to the masses of market participants.  The 1970s and 1980s did NOT have this kind of efficiency - and therefore, active management during those decades would have likely been capable of consistently outperforming the index. 
 
CHORTLE!
This time it's different!!!!
I see no reason that the human animal of today is any more rational or efficient than he was 20 years ago.
Yes, today's market has more trading volume and information flowing freely -- too much volume and information for us to process -- but that doesn't mean investors or indexes react appropriately. KO was 46 today, but 65 a year ago. Efficient pricing would assume that 46 is the fair price. If the market was efficient, it would not be volatile.
Finally, we've just seen the financial markets implode in large part because Ivy-League boys thought they were so smart and so efficient that the rules of human nature and history did not apply to them.
 
 
Nov 14, 2008 8:43 pm
 
You're wrong.  Humans ARE more rational today, than they were in the 70s.  Not emotionally speaking.  Rationality has a few pre-reqs.  ONE of them, is know ALL relevant information, before making a decision.  Obviously, that isn't possible.  Ever.  But, by MORE market participants, now having MORE information (not all, but more), and more efficient means of processing that information, that DOES make them "more rational." 
 
Just a difference of opinion here; I don't have the facts at hand to make a good argument.
But I doubt we're any more rational than we were even 2,000 years ago. This century has been full or crazes and manias, many of them still in full bloom. One example is this current market, which blew up because of irrational behavior and because it didn't process the information it had.
I think all the data has overwhelmed us. Investors have Bloomberg's and CNBC and S&P reports -- but the best of them are not as widely read, not as well-rounded and not as sensible, imo. What good is all that information if you don't have a context to place it in.