“Ordinary investors, who have watched the value of their 401(k)s yo-yo seemingly at
random, have been left feeling understandably
dazed and confused as they head into the new year.”
-James Surowiecki
Last year the major indices usually represented in a well-diversified portfolio had total returns for all of 2011 that weren’t great:
S&P 500 (US stocks) 2.1%
EAFE (Foreign stocks) -11.7%
1-month T Bill (Cash) 0.0%
BC US Aggregate Bond (Bonds) 7.8%
A diversified portfolio weighted 20% each to holdings that were benchmarked to these indices (along with an equal portion in real estate) would have had a total return of only 1.5% for the year. This is the weakest performance for these various asset classes since the overall portfolio loss of 23% in 2008.
The Morningstar mutual fund database assigns each of the more than 28,200 mutual funds to one of 104 Categories. A quick analysis of the Category Averages of all the mutual funds in these 104 Categories clearly indicates where investors made money and where they lagged. These Category Averages through December 31, 2011 were ranked in decreasing order of returns for the year. Here are the important numbers for those in the top half and the bottom half:
12 Month Portfolio Mix
Return % U.S. Stocks %Foreign Stocks %Bonds
Top 52 Categories 4.61% 20.6% 4.4% 57.8%
Bottom 52 Categories -10.45% 36.8% 43.5% 4.5%
You can see that bonds clearly produced stronger returns than either U.S. or foreign stocks. The portfolio of the top group of Category Averages was made up of almost 60% of bond mutual funds while the bottom group had less than 5% invested in bonds.
Probably the worst part of 2011 was the extreme volatility of the markets that made portfolio mix decisions so difficult. The year was filled with spiking rallies and precipitous selloffs with one driving the market down 17% in two weeks. Maria Bartiromo, once dubbed the “Money Honey” by a critic of financial TV entertainment programing, had several field days when the Dow Jones Industrial Average changed more than a hundred points on 40% of trading days. The Standard and Poor’s 500 index, generally considered to be a broader measure of the market than the Dow, moved 2% or more in 60 trading days. In 2005, that didn’t happen even once.
This kind of volatility makes investing even more daunting and depressing than it already is. You know that stock mutual funds routinely outperform bond funds over longer time periods. But you accept it on faith that they will continue to do so. What you try to do is hold a balance between the two but it’s hard at times especially when the markets themselves seem so different from those you’ve seen before. Be prudent. Be patient.
“Odds are the consensus forecast for 2012 is wrong. It almost always is.An economic columnist’s heart wants to believe the economy will do better;his head tells him it’s likelier to be worse.”
-David Wessel
The quotation “Prediction is very difficult, especially about the future,” and its several variations, have been ascribed to Niels Bohr, Robert Storm Petersen, Mark Twain, Yogi Berra, Samuel Goldwyn and others. The idea is understandable and yet all sorts of folks go ahead and continue to pronounce what the future holds for us especially at this time of the year. Burton Malkiel has pointed out that at the start of 2011 several pundits warned that the low yields of U.S. Treasuries constituted a “bond market bubble.” In fact, if you had bought 30-year Treasuries then when they were yielding 4.42% and held them until the end of 2011 when their yields had fallen to 2.89%, you would have earned an investment return of 34%. Not bad.
In a recent Wall Street Journal article David Wessel did a good job of laying out all the key factors that could work to help get the American economy back on its feet and also of highlighting the things that could go against that recovery. The daily news in any form is loaded with the details and the interconnections between what goes on in Europe and reverberates on America’s Main Street. David Brooks said last night that President Obama’s reelection chances are essentially dependent on what German Chancellor Angela Merkel does. It sounds odd, but he could be right.
You can continue to watch the improving unemployment numbers, the Case-Shiller Index of housing prices, the profits of American businesses in various sectors, commodity prices, and any other leading and lagging economic indicators that you like. On top of that sea of data rides the election year rhetoric and wrangling that seems so odd given the fact that the American public is so disenchanted with U.S. politics and the seemingly permanent dysfunction of Washington. So what’s the ordinary American to do? The best policy is that you stick to your knitting.
Since the fall of 2008 everything that used to work in the American economy and in your financial life has been negatively affected. It would be really easy to give up and forget about saving and investing or staying in school for that college degree. All those things that you used to pursue in the hopes of a reward now go unrewarded. It’s almost like anything that you do makes no difference. Actually, nothing could be farther from the truth. Just because all your good financial and professional habits haven’t yet been met with positive financial results, you shouldn’t abandon them. Of all the great things that 2012 holds for you, the greatest might very well be a wonderful opportunity to grow and improve knowing full well that your rewards will come in time. They always do.
Happy New Year!
“The most real things in the world are those that neither children nor men can see.”
-Francis P. Church
“Of all who give and receive gifts, such as they are wisest.
Everywhere they are wisest. They are the magi.”
-O. Henry
Sometimes the simpler things can give us valuable insight. Today people are at odds with their governments, parties squabble endlessly, and religious and cultural violence seems permanent. In the spirit of the holidays–whatever your faith if you have one and whatever your favorite celebration–the emotional pull of being better, kinder, forgiving, and thoughtful seems universal. In that spirit think about a newspaper editor’s simple response to a young reader and a very short story.
In 1897, an 8-year-old Virginia O’Hanlon asked her father if Santa Claus really existed. He suggested she write to The New York Sun adding “If you see it in The Sun, it’s so.” She did just that and editor Francis P. Church’s front page reply has endured. “Yes, Virginia, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy. [Without Santa Claus] there would be no childlike faith then, no poetry, and no romance. The most real things in the world are those that neither children nor men can see. Ah, Virginia, in all this world there is nothing else real and abiding.”
O. Henry’s “The Gift of the Magi” is the story of Jim and Della living in the 1900s and struggling to get by. Their love and devotion for one another defines their lives and their only material and emotional treasures beyond their shared love is her beautiful long hair and his gold pocket watch. After months of scrimping Della manages through sacrifice to buy Jim an elegant platinum fob chain “worthy of the watch.” Jim returns home as Della prepares chops for dinner. She presents this wonderful gift to Jim and explains that she sold her hair to buy the fob. “Dell,” he said, “let’s put our Christmas presents away and keep them a while. They’re too nice to use just at present. I sold the watch to get the money to buy your combs. And now suppose you put the chops on.”
The ideas of faith, imagination, and selfless love at this time of year rise above other considerations that can seem so important most of the year. Think about these things and enjoy this holiday season in whatever way you and your family and friends prefer. Think about continuing your holiday through the coming year with the faith and optimism of a young Virginia and the devotion and love of a Della or a Jim.
Happy Holidays!
“Pigs Get Fat. Hogs get Slaughtered.”
-Folk Saying
“Every dog has its day.”
-Idiom
Yesterday the Dow Jones Industrial Average soared more than 490 points. This 4.2% gain was the strongest since March 23, 2009 which marked the bottom of the market downturn that began six months earlier. Financial stocks within the Standard and Poor’s Index climbed 6.9% and French stocks rose 4.2%. All of this good news has been widely credited to the Federal Reserve’s moves to make it less costly for European banks to borrow U.S. dollars. Today the stock market was essentially flat on news from Europe that Spanish debt instruments might have their credit ratings downgraded. The Dow had been down 6% for November but this rally meant that the month closed up .8% and that the Dow is now positive by 4.04% for the eleven months of 2011.
But what does this strong rally really mean to you? Can you take this as the first of many positive days and as the start of a steady recovery in the stock market? Or does this good news send a different message?
If there is a single lesson for American investors in this sharp market gain, it’s that no matter how bad the economy gets, no matter how poorly stocks and/or bonds are performing, a balanced portfolio that gives you exposure to a broad array of investments is the best kind of portfolio to hold continuously. Individual investors can become discouraged and even embittered by the kind of persistent, depressed market that we’ve experienced since the fourth quarter of 2008. There have been periods of good gain like the last six months of 2010 but it’s felt more like a protracted stretch of flat or negative returns with very high levels of volatility to boot. It might have seemed silly and pointless to hold U.S. and foreign stocks during these bleak stretches but there’s no telling when stocks can once again begin to turn in attractive returns. During the technology bubble of the late nineties and the real estate and credit bubble that led to our current mess, the idea of holding bonds when stocks were turning in double digit returns seemed crazy. The reason that smart investors continue to hold a balanced portfolio is all those assets, at one time or another, produce good returns. We can’t predict their future and we can’t predict when they will rise or fall.
European leaders are scheduled to meet again next week and many would prefer that the German-French team of Merkel and Sarkozy can prevail in encouraging Euro nation to subscribe to austerity measures that would require greater prudence and fiscal responsibility going forward. We’ll see. Stayed tuned and stay broadly invested.
“It is a good thing to give thanks unto the Lord.
Across the uncertain ways of space and time our hearts echo those words.”
-President Franklin D. Roosevelt
“True, we have had our difficulties . . . but all of these have made
us stronger to do the great tasks which have fallen to us.”
-Paul Labilliere
Dean of Westminster Abbey, 1942
For the first time in American history, our citizens in military uniform serving outside the U.S. in 1942 had to find a way to celebrate Thanksgiving. In England those Americans used the opportunity to introduce the British to our homegrown holiday.
Merchant ships brought tons of frozen turkeys across the dangerous Atlantic for the festivities. The Americans donated all of these to the thousands of British wounded recovering in hospitals. Instead of the traditional turkey dinner, the Americans ate roast pork and had plum pudding for dessert. The Lord Mayor of Boston in Lincolnshire invited 100 servicemen to be his guests for a modest wartime dinner. Afterward, a senior officer laid a wreath on the memorial to five pre-Revolutionary War royal governors who had been born in the historic city.
The most dramatic event was the ceremony that took place in London’s Westminster Abbey. No British government had ever permitted any ritual on its altar except the prescribed services of the Church of England. On November 26, 1942, they made an exception. Even though the event had only been announced in a small newspaper ad, the Abbey was quickly filled with more than 3,000 uniformed men and women. One reporter described the tomb of Britains’ unknown soldier of World War I as being surrounded by a “hedge of khaki.” Corporal Heinz Arnold of New York state played “Onward Christian Soldiers” on the coronation organ.
As you celebrate your Thanksgiving today think of the value and the power of your gratitude and your passion for helping others. Think about ways of sharing your day with others who might not be with friends and family and might not even understand Thanksgiving at all. Our holidays are wonderful opportunities to “include people in,” to build on Samuel Goldwyn’s famous quotation. It’s a great chance to show who we are as Americans to the rest of the world and thereby to build deeper, healthier bonds of friendship and understanding at the human level that mere political diplomacy between countries can’t do. Happy Thanksgiving!
Thomas Fleming, former president of the Society of American Historians, recounts these events and others in his new book “An American Feast: Six Memorable Thanskgivings.”
“There is no distinctly native American criminal class except Congress.”
-Mark Twain
When the Occupy Wall Street demonstrators set up shop in New York City’s Zuccotti Park two months ago they sent a message. Through their signs, slogans, and shouts they represented the noise, anger, and frustration of many Americans who have suffered in our financial crisis. They weren’t neatly organized, didn’t have a spokesperson, and certainly had no truly global organized plan to bring about change that would benefit “the 99%” over “the 1%.” Nevertheless, their demonstrations are popular, spontaneous events that persist in sending a message of dissatisfaction with the way things are. One estimate is that 70% of the occasional marching attendees are actually employed.
Now, however, other voices are providing the facts, the history, and the details that point out some of the unique characteristics of American government that make the protestors and many other Americans so frustrated with Washington and Wall Street. Charlie Rose interviewed Harvard Law professor Lawrence Lessig last week about his book Republic, Lost–How Money Corrupts Congress and a Plan to Stop It. Essentially, through numerous legal arrangements members of Congress can place stock trades based on information they receive during committee work and hearings. If you or I did that this information would be construed to be nonpublic information and our investments would be seen to be in violation of insider-trading laws. These same legislators have been offered preferential buying opportunities to invest in initial public offerings by firms that are subject to the laws passed or not passed by the Congressional subcommittees these legislators serve on. Again, in other situations these acts would be seen as serious conflicts of interest.
Peter Schweizer, a research fellow at Stanford University’s Hoover Institution, outlines other strategies used by the folks in Congress in their transformations from being ordinary citizens from a variety of working and professional backgrounds to becoming multimillionaires. His book is Throw Them All Out. Very notably his analysis of the portfolio performance of accounts owned by those in Congress outperform those of average folks and of the market indexes themselves.
Democrats and Republicans can continue to wrangle and debate and pontificate about what “the American people want.” What these two authors and others are arguing for is a different system wherein the crushing power of money and its influence is reduced by systems of real-time transparency and disclosure. It isn’t a matter of party politics. It’s more a matter of a system of open government and public debate and elections that can’t be subverted by money and money alone.
“Forgive me, I must start by pointing out that three years
after our horrific financial crisis caused by financial fraud,
not a single financial executive has gone to jail, and that’s wrong.”
-Charles Ferguson
“Inside Job”
2011 Oscar Speech
“Art is a lie that makes us realize truth.”
-Pablo Picasso
Don’t you long for those stories and movies of your childhood in which the bad guys were caught and punished and disgraced? Don’t you remember how the good guys and the good people they protected were once again happy and safe and secure? Don’t you sometimes feel that we’ve lost that today?
After a scam is detected and people have been devastated, there are criminal trials and civil trials and legal findings and very little in the way of true restitution. Politicians and regulatory authorities posture and pontificate and essentially try to “out cop” one another in the eyes of the public and the voters. Unfortunately, the victims of little frauds and massive financial crises alike simply lose out. Wouldn’t it be great if once we could have some outcome that seemed to truly be “right” and fair and fundamentally just in the same way your Mother or Father thought of justice?
The new film “Tower Heist” is fiction but it delivers a sweet, if goofy, reminder of what justice might look like at the hands of a motley band of mismatched co-workers whose pension funds have been lost to an unscrupulous investment advisor. The movie is funny, engaging, clever and its characters are filled with the oddities that make them real folks. The bad guy is really bad and through a quirky, tortured, and hapless string of events these true-to-life victimized folks are able to realize a distinctive form of justice. You’ll have to take much of the action on faith but the overall impression the movie leaves you with is fun.
Many times, under all sorts of circumstances, my Mother would tell me that, “Two wrongs don’t make a right.” Usually she was arguing against my instincts to get into a fight with a friend or to deliver an insult for one received. But there she was trying to make me a better boy in the face of my anger. She was right, of course, and still is. She’s long gone now but if I had taken her to see “Tower Heist” today she would have been as happy as I was with the sweet justice in this film. Go see it and I’ll bet you, too, will feel a little happy!
“The moment we want to believe something, we suddenly see all the arguments for it,
and become blind to the arguments against it.”
-George Bernard Shaw
“The way to see by Faith is to shut the Eye of Reason.”
-Benjamin Franklin
Today the Dow finished up 22.5 points and yesterday it climbed 339.5 points or a whopping 2.9%. In fact October is shaping up to be a great month. Through the close of business today October’s returns are up 12% which is the best monthly return since 1987. What’s behind these welcomed market increases? Ostensibly, the markets are reacting to the good news from Brussels that an agreement for a bail out plan for Greece has been reached by European Union leaders. For the U.S. this means a reduced likelihood that our markets will be negatively impacted by defaults of Greece’s debt instruments. The problem with that news and the more serious issue of the market’s response is that “the devil is in the details” and we don’t know all the details yet.
One of the vexing characteristics of market booms and busts is that when things are bad for a long time folks are just itching to start investing again as soon as markets stabilize and appear to be starting another series of gains. Our U.S. markets dropped off the cliff in the fourth quarter of 2008 and in the intervening three years we’ve seen improving market returns followed by more lagging numbers and an increase in the magnitude of the two. Market swings themselves have been increasing and that added level of risk has really only been perceived by investors as uncertainty and no one feels like investing faced with a vague and volatile future.
Today U.S. investors know that American companies are cash-rich, more productive than ever, consolidating their financial positions by actually buying back shares of their own firms from the investing public, and basically perfectly poised to start to do more business, to start to rehire laid off employees, and to expand their product lines as soon as consumers start to buy. So the situation is one of heightened expectations. Companies are looking for good news so they can start to do more business and investors are looking for good news so they can start to recoup their 401k plan and IRA losses. All those expectations can cloud judgment and rational decision-making.
You and I and most other American investors would be thrilled and optimistic if a truly serious, effective, and a reasonable plan for stabilizing the economies of Greece and Italy and other countries at risk was agreed upon. We have to wait and see. The most judicious policy here and now is to remain watchful for market developments that show real promise of leading to stable markets and even more secure governments. The announcement of an agreement for stability is just that. There needs to be political cooperation and a true restoration of confidence on the part of all investors worldwide that the nations of the world are financially stable and that it’s safe to start investing again.
“I think people are frustrated, and the protestors are giving
voice to a more broad-based frustration about how our financial system works.”
-President Obama
“Does anyone really not know what the basic message is of this protest:
that Wall Street is oozing corruption and criminality and its unrestrained political power
—in the form of crony capitalism and ownership of political institutions—
is destroying financial security for everyone else?”
-Glenn Greenwald
It’s a whopping understatement to say that Americans are frustrated with our financial and economic systems. Those demonstrating in Manhattan and in nearly one thousand other city locations are acting out of their profound disappointment with American life in its multiple manifestations. Their cardboard signs tell the tale of their plights and worries:
FIGHT FOR YOUR AMERICAN DREAM THIS IS MY JOB
WALL STREET: NOT IMMUNE FROM JUSTICE 99% FOR CHANGE NOW
IF THE WAR ON POVERTY WAS A REAL WAR WE’D BE PUTTING INTO IT
ROBIN HOOD WAS RIGHT
YOU KNOW THINGS ARE MESSED UP WHEN LIBRARIANS START MARCHING
ONE DAY THE POOR WILL HAVE NOTHING LEFT TO EAT BUT THE RICH
TEAR DOWN THIS WALL STREET THIS IS SO NOT OVER
DUE TO BUDGET CUTS THE LIGHT AT THE END OF THE TUNNEL HAS BEEN TURNED OFF
This is essentially a leaderless, agenda-less, and shapeless expression of human despair. There haven’t been lists of demands or specific, official policy statements advanced. The varied concerns deal with: finding jobs, modifying student loans, taxing the rich, forgiving debts, healthcare, and almost any other issue you care to name. Some deal with globalism, environmental policy, and uneven immigration practices enforced state by state. The growing disparity of wealth in America is blamed on “a small group of wealthy big players controlling the political and economic system for their own benefit.”
At the heart of this is a fundamental sense of pain that America really has lost its way. These folks might be seen as “hippies and bums” but their complaints, their numbers, and–most importantly–their ideas demand serious attention. To date the financial crisis has been dealt with by politicians and Wall Street itself. Let’s add some of these other folks into the mix for new ideas of reform by listening to Main Street, too.
“Worry does not empty tomorrow of its sorrow; it empties today of its strength.”
-Corrie Ten Boom
“The secret of health for both mind and body is not to mourn for the past,
worry about the future, or anticipate troubles
but to live in the present moment wisely and earnestly.”
-Buddha
For the first week into the last quarter of 2011 it doesn’t look like the year is going to finish positively as did 2010. You don’t watch your portfolio on a weekly or even on a monthly basis. Nevertheless, you do get a sense from market, political, and economic news that foreign markets are seriously depressed and the U.S. market is struggling. Bonds, the current refuge of investors, continue to do relatively well.
At the end of the second quarter (through June 30, 2011) the Morningstar database showed that the top 52 of 103 Categories of mutual funds that it tracks were up 29.20% for the latest 12 months. Those 52 Categories held underlying investments that were divided about 45% U.S. stocks, 35% foreign stocks and 10% bonds. Even though the Morningstar data for the third quarter (through September 30, 2011) isn’t available yet, I can tell you that the returns will look almost like the exact opposite. Both U.S. stocks and foreign stocks are now in negative numbers and bonds of all descriptions (government, muni, and corporate) have positive single digit returns. If this feels like the last quarter of 2008 all over again, you’re not alone. The Dow Jones Industrial Average lost 12% and the Standard and Poor’s 500 Index was down 14%. Both were down more than their declines in the first quarter of 2009– their lowest points.
Right now many investors have given up hope of a positive 2011 perhaps as a repeat of the strong finish we saw in the last half of 2010. Instead, most are looking for a safe haven to prevent further losses and to eke out some kind of positive return. That means bonds with current 12 month returns ranging between about 2.5% for intermediate corporate bonds to 16% (yes, 16%) for long government bonds.
The sources of the uncertainty and low levels of confidence that investors are showing by fleeing stocks are many. You see indicators from China that its banking system has problems and that its economy is slowing down. In Europe, the problems related to the bailout and rescue of Greece, largely a function of Germany’s leadership, are still undecided and in the U.S. many are waiting to see how our 2012 elections turn out and how the administration’s new jobs program will be dealt with by Congress. Investors waiting for politicians, here and abroad, to take some decisive steps to improve these economies is a discouraging state of affairs.
Client portfolios are now heavily weighted toward bonds, hold nothing in foreign stocks, and contain about 10-20% in U.S. stocks. This isn’t as asset allocation that makes for an efficient trade off between good returns and low levels of risk in normal times. But then, again, these aren’t normal times.
