Letter to Our Clients - April 2009
Dear Clients and Friends,
Given the state of the economy and unemployment rates, the Dow Jones Industrial Average (an unmanaged index in which you cannot invest directly) should be about 6000. Given the amount of money the government is pumping into the economy, the Dow should be about 10,000. Given that both scenarios are happening simultaneously, it is no wonder the Dow is about 8000.
It is interesting, though, that on March 9th the Dow was about 6500. At that time on Wall Street, among politicians, in the media, on the street – in short, everywhere, negative sentiment was overwhelming. The consensus was clear – the Dow was going below 6000, and it would be years before it would rise to 8000 or higher. 31 days later, on April 9th exactly, the Dow WAS over 8000. The stock market had risen over 25% in 31 days, from a point where many who had not yet gone to cash gave up and sold everything in order to avoid “losing it all.”
That was then. What about now?
I think the odds are better that the Dow will end 2009 closer to10,000 than to 6000. However, I also feel that it is possible the Dow will drop to 6000, plus or minus, on its way to year-end. The challenge is to have and maintain an investment strategy that can take advantage of up markets while remaining comfortable and confident during downturns.
Many people generally are not happy with this kind of guidance. They want me, or someone, to predict which way the markets will go, and when, with a focus on the monthly/quarterly/and annual returns. Ben Stein wrote an interesting article in the NY Times (March 29, 2009) about humans’ desire to seek out experts who will predict political outcomes, consumer trends, stocks or markets, interest rates and commodity prices. His article started off as a commentary on Jim Cramer’s appearance on The Daily Show with Jon Stewart. Mr. Stein felt Stewart was justified in criticizing Cramer for his optimistic talk about Bear Stearns, and for failing to inform his audience about unfolding events that were not consistent with Cramer’s earlier views. Stein then wrote: “It does not matter if you are Mr. Cramer or if you are Warren Buffett. Human beings cannot tell the future, or at least cannot tell it in any consistent way.”
And yet – we are bombarded with negatively slanted news, regarding politics, global events, crime, the economy, weather disasters. You name it, it plays over and over. (How many times did you see the planes crashing into the Twin Towers?) Research indicates too much exposure to this kind of coverage creates a negative attitude among viewers/listeners, which can lead to depression on a personal and a community level. My belief is that we would do well to recognize that the people who are giving us this information are entertainers – their mission is to capture sizeable audiences which result in advertising profits for the host companies. Their mission is not to “inform” or “educate.” It is to grab your attention and keep it. It is up to us to filter out that which is either not true or not useful.
It is clear we are in a difficult economic situation. It can still turn out badly. Personally, I believe that we have been through worse times before, and we have always survived them and prospered following them. I think we will do so again.
And, as we do, I believe the financial markets will again rebound before the economic indicators give any hint of recovery. Anyone wanting to wait “until the economy or the markets are more stable” will likely be late to the game and miss a major percentage of the rebound. Worse, they are then vulnerable to a loss in value and consequently might regret buying back in if and when the markets do pull back.
There are only two ways to safely participate in market rallies. One is to remain invested according to a long-term strategy. The other is to be constantly buying into the market through periodic investment programs, either in retirement plans at work or with systematic plans in regular accounts. This second approach is the only way to be certain you will have bought into the market at its bottom.
Investing is hard work. It is much more difficult than TV shows, advertisements or the print media make it out to be. Whether someone wants to do it with or without an advisor like us, the challenge is not about buying correctly. I believe it is about the following:
1. Knowing when to sell. (In the 27 years I have been in the business, I have had more regrets about selling too soon as opposed to buying too high.)
2. Ignoring the trends. So many investors buy when the markets are rising, and sell when the markets drop. This is why research reveals that investors as a class never obtain the returns available in the indexes. (Remember the statistics I quoted in earlier letters, that investors consistently earn 50% less return than market indexes, and this is usually the result of being in cash those very few days when the market has its strongest up-side movement.)
3. Remaining disciplined to maintain a well thought out long-term investment strategy. This is difficult to do in up markets, when the temptation is to buy more and think we can time the exit. It is much more painful in down markets, when it feels like “I just can’t afford to lose any more.”
4. Keeping performance figures in perspective. As someone who feels the need to work within the mainstream of my industry, I feel I am part of the problem with this issue. All of us, the investing public and financial services professionals, are addicted to monthly, quarterly and annual returns. This is very distracting when one is investing for long-term goals such as retirement income or college funding. If we make only 4% and the Dow was up 15%, it does not necessarily mean we have been too conservative. If our account value is worth less after a period of time, it does not mean we were too aggressive or should have made different choices. We should stay focused on what we need our money to do at the time we need it, and concentrate on whether our strategy remains consistent with that goal. This is what we should be discussing, not whether you are up or down a certain percentage over a given time period. However, focus on performance is the norm. Everyone is doing it, everyone will continue to do it. I think performance should always be addressed, but it should be a consideration, not the driving factor, because if we think back to Mr. Stein’s article, no one can predict the future, and therefore we cannot control the outcome (performance) of the investment decisions we make now. Instead, we should manage our financial resources as the running of a business, and not like a trip to Las Vegas.
Please contact me if there is anything I have written you would like to discuss, or if there is anything happening in your life which might affect your cash-flow, your long- or short-term goals, or your investment strategies. As always, I look forward to talking with you, and thank you again for the opportunity to work with you.
Robert K. Haley, JD, CFP®, AIF®