Monday, February 2, 2009

Past Performance is No Guarantee

Past Performance Is No Guarantee…
by Bert Whitehead, M.B.A., J.D. © 2009

In the past 75 years (1934-2008) the S&P stock index has suffered total return losses of more than 20% in four different calendar years, the most recent was last year’s 37.0% decline. In the year after the three previous 20%+ declines, the index gained an average of 32%.

The danger of liquidating stocks now is when the market does turn around it will likely be very sudden. Investors who seek an all-cash haven will miss out on the growth

Most clients have bond ladders with US Stripped Treasuries that have appreciated significantly. It is tempting to sell the treasuries to reap the capital gain now, and plan on buying them back when interest rates go back up.

We don’t recommend selling as the bond ladder gives you certainty. If this recession comes to an end soon, increases in stock values will allow your portfolio to correct itself. If the recession persists, however, you will not be able to replace your ladder for the amount you sell it for now.

There is a 20-30% chance that we may be facing a ‘Dead Decade.’ This financial phenomenon is rare, but it does occur. Japan went through a ‘Dead Decade’ in the 1990’s. The Nikkei stock market dropped from 37,000 to 10,000 and never closed above 15000 for 10 years. At the same time, interest rates dropped in Japan to 1.0-2.0% even for long term government bonds.

We don’t try to time the market, and are not predicting that a ‘Dead Decade’ is in store for the US. However, we do plan for a prolonged economic squeeze, which may well suppress interest rates even below current levels. This is the most dangerous possibility we may face.

While the changes we are experiencing are exogenous, many clients are feeling the effects endogenously. We are stressing to keep high liquidity during this post-election turmoil, and not selling long-term investment assets. Each individual’s situation is different, so your investment portfolio must take into account the risks which you may face.

It is easy to believe that the past will be repeated, but when it comes to the market, history is not a reliable predictor of future performance.

No comments: