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March 01, 2012 at 07:00 PM
I recently received an email from an advisor who took issue with much of the premise behind my November 2011 Investment Advisor column: “Not Your Father’s Commodity Investments.” It seems he disagrees with my notions that we seem to be in a dramatically new market compared with the one we’ve grown used to over the past 25 years, and that the old market continued on through the dot-com crash to end in July 2007. While it’s true that following markets is often like reading tea leaves, it sure seems to me that we’re in the middle of some dramatic economic changes that have long-range implications for the way independent advisors manage client portfolios—and possibly for the independent advisory industry itself.
First, here’s his side of the story: “You say ‘the use of short selling … allows fund managers to generate positive returns regardless of which direction commodities markets are trending.’ I would think that also means that they can generate negative returns even if commodities generate positive returns. Also, I’m confused by ‘…during the 25-year bull market, there hasn’t been much need for alternatives. […] Now the ride up seems to have come to an end.’ We are in a 13-year sideways market, so unless your November 2011 article was actually written 12 years ago, alternatives have been a great place to be over the past decade. My clients have benefited. But to say that now the ride up seems to have come to an end is ridiculous: For the last three years we have seen fear and panic, but stocks are up nearly 100% during that time. In general, stocks look extremely attractive now with rising dividends, strong earnings, clean balance sheets, etc. Why is the ride over? I would be a contrarian here and say that those who thought they found a better mouse trap with things like managed futures a few years ago have been sorely disappointed and that in a choppy market, trend-following will be a lousy strategy.”
Here’s the funny thing about markets: If stocks fall, say, 80% during a given period and then go back up “100%,” you’re still out 60% of your original value. In more realistic terms, from its all-time high in July 2007 to the mortgage meltdown bottom in January 2009, the S&P 500 fell from 1,527 to 798, down 729 points or 47.7%. Then, from that 2009 bottom to Jan. 20, 2012, the S&P did indeed claw its way back to 1,315, up an amazing 517%. Unfortunately, that means buy-and-hold investors are still down 13.9% from the 2007 market top, some four years later, an annual loss of 3.6%—tough to build a retirement portfolio on numbers like that.
What’s more, by strategically picking peak to trough, many so called “bull markets” can be made to appear flat. For instance, from July 2002 to the market high in July 2007, the S&P grew from 815 to 1,527, an increase of 87.4% in five years. But from the pre-dot-com crash high of 1,499 in January 2000 to the 2007 high, the market only grew 28 points or 1.9% over seven years. When it comes to the stock market, truly, much is in the eye of the beholder, so it’s helpful to look at longer trends for a bigger picture of what’s really going on.
A longer view shows a very different picture. For the 12 and a half years from January 1995 to the July 2007 market top, the S&P grew from 501 to 1,527, or 205%. That means a well-allocated buy-and-hold client made an average annual return in the 9.75% range on the equity portion of his portfolio, despite the dot-com crash and the devastating 9/11 attacks. What’s more, for a really long view, from April 1982 to the all-time S&P 500 high in 2007, the market went from 109.6 to 1,527, up 1,417 points or 1,288%. That’s an average annual gain of 11.1%, year in and year out, through ups and downs and including market corrections in ‘87, ‘91, the dot-com crash and 9/11. These are the returns that the modern independent advisory industry was built on.
