In today’s challenging market environment, financial advisors are struggling to help their clients gain control over their finances, but few pay close enough attention to how they generate their own income and manage their own personal financial affairs. To help advisors do this, it will be useful to take a historical look at the market (from the post-dot-bomb bust in 2002 until today) to gain some broader perspective. As Winston Churchill once said, “the farther back you can look the farther forward you can see.”
In October 2002, the Dow stood at 7,591 and rose to a high of 14,279 on October 11, 2007 — for a total gain of 88 percent or 13.5 percent compound growth over the five-year period. The October 2002 DJIA of 7,591 was of course down from the Jan. 14, 2000 high of 11,723 — representing a 41 percent compound drop in 18 months. However, from Oct. 11, 2007 when the Dow reached a high of 14,279 to its recent low of 6,440 on March 9, 2009, the cataclysmic 54.9 percent drop represents one of the most dramatic events in U.S. financial history.
Let’s take a brief look at the period covering the 1960s through today on the DJIA.
’60s: Decade low on 6/20/62, DJIA was 536, and decade high on 2/4/66 was 995; comp. growth: 16.7%
What Your Peers Are Reading
’70s: Decade high on 1/11/73, DJIA was 1,052, and decade low on 12/6/74 was 578; comp. growth: -45.1%
’80s: Decade low on 5/21/80, DJIA was 759, and decade high on 10/9/89 was 2,791; comp. growth: 15.6%
’90s: Decade low on 10/11/90, DJIA was 2,365 and decade high on 12/31/99 was 11,497; comp. growth: 14.2%
’00s: Decade high on 10/11/07 DJIA was 14,279 and decade low on 3/9/09 was 6,440; comp. growth: -54.9%
From the data it appears that the current significant drop in the Dow from the high in October ’07 to the current low (March 9, 2009), which represents approximately a 54.9 percent compound rate of decline over the last 17 months, is significantly steeper than the drop in the ’70s of -45.1 percent. Now, let’s take a look at the last 10 years of the Dow and examine the impact it might have had on your business.
Clearly, from 2000 to early 2002, the Dow was relatively flat, and then we had two steep drops, with a resultant sudden improvement at the end of ’01. The following year was tough for the Dow and yet from early 2003 the market vaulted upwards back to the levels we saw from 2000 to 2002. Then for the period covering 2004 to mid-2006, the market rose from 10,000 to 11,000. In mid-2006, we began the dramatic rise to the point where we topped out in Oct 2007, whence began the precipitous drop to the levels we see today.
Where are you going?
In order to look forward to a post-recession economy, we need to look back and ask some questions as to how you have managed your client’s investments:
1: What did you do with your clients’ investments in 2001 when the Dow dropped from 11,000 to about 8,400 before rebounding back to 10,000 at year’s end?
2: What did you do with your clients’ investments in 2002, when the Dow dropped from above 10,000 to around 7,400 and took a long time in all of 2003 to recover back to 10,000?
3: What did you do with your clients’ investments from 2004 to 2005 in a slow-growth market?
4: The questions as to what you advised your clients to do from the period beginning in 2006 to the high in late 2007 is moot, since the growth allowed the opportunity for most clients to make significant returns.
Since I am not an investment advisor, but someone who has financially guided numerous individuals and companies over the past 35 years, allow me to lay out a strategy which I believe will be helpful to your business in the next 12 to 18 months.
When it comes to my selection of an investment advisor (whom I have been with for a long time), I want someone who can and will provide any or all of the following:
- Works with me to discover my personal financial objectives, including my long-term objectives for retirement
- Assesses my entire financial situation (all major holdings including home equity, art, stock options, etc.)
- Designs a customized investment plan that offers a realistic opportunity to achieve my goals
- Screens the industry’s best service providers to identify those that offer services that complement my goals