A Case Study On The Ups And Downs Of The Stock Market

Comparing 2008 and 2010

A couple of years ago, reviewing portfolios with clients presented slight problems.  Lest we forget in October of 2008 every asset class went down.  The entire financial system was being battered by a Category Five hurricane.  Remember how portfolio values plummeted, fast-forward two years and meetings are more enjoyable.

We use Principia™ from Morningstar and a report generated last week brought a few salient points.   Morningstar analyzes portfolios by choosing the best/worst three-month, one-year and three-year return over the last ten years.   What fascinated me was the best three-year return for this portfolio (April 2003 to March 2006) was immediately followed by the worst three-year return (March 2006 to February 2009).   Conversely the best one-year return (March 2009 to February 2010) came on the heels of the worst one-year return (March 2008 to February 2009).  If you wanted a perfect illustration of market-timing foolishness, you could not have picked a better example.

This portfolio’s emerging market allocation rose sharply. Investors chase returns-the data is irrefutable.    The dramatic inflow to bond mutual funds keeps pundits and prognosticators busy warning about the pending “bubble” in bonds.  Even Warren Buffett opined that the bubble in government bonds would be next to sear investors but folks keep piling money into bond funds. Investors are also shoveling cash into emerging market equity funds because of their rapid growth.  Financial bell-weather Barrons  reports over 85% of all international mutual fund inflows during September went to two broad market indexes – Vanguard Emerging Market  (VWO) and iShares Emerging Market ETF (EEM).  Investors have seen the light regarding exchange traded funds like VWO and EEM versus higher cost mutual funds but that light could be a train barreling down the line.

It makes sense to have emerging market stocks and government bonds in your portfolio but make sure your allocation is appropriate for your age, risk tolerance, and needs.   If you don’t have a strategy or a plan before you invest then keep your money in your pocket because it is human nature to follow the crowd.

The timeframe intrigued me so I dug a bit more.  This portfolio’s best return on any one-year period over the last ten years was during President Obama’s term.   Huh? President Obama’s opponents label him a socialist bent on taking over government, ending free markets and other dastardly deeds. Historically speaking, when socialist regimes seize power stock prices collapse.   For the first 18 months of President Obama’s term, the S&P 500 rose almost 32%.  Through August 2002, under President George W. Bush’s tutelage, the S&P 500 lost over 17%.    These numbers suggest Obama needs to revisit his socialist agenda because socialists and the investor class are blood opposites-think Auburn/Alabama.   Of course, this could be a ruse, remember, his grandmother put a fake birth announcement in the Honolulu newspaper.

Warren Buffett and I share two things, each of us owns a few shares of Berkshire Hathaway and we both are bullish on America.  America will get through this crisis, our nation fought a civil war and gamblers once fixed the World Series but we still endure.   Jingoistic hyperbole and over-the-top rhetoric solves no problems.

Intense political struggles are as American as apple pie, our third Vice-President killed Alexander Hamilton in a duel.  After the 1787 Constitutional convention, Benjamin Franklin told an audience that America was a republic “if you can keep it”.    Remember that quote.

In full disclosure, my wife and I own VWO.

About the author

Buz Livingston, CFP®

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