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Adrian Mastracci, president of KCM Wealth Management, says “Investing is about finding a comfortable balance between incurring investment risk and reaping returns." |
For Immediate Release
Vancouver, BC (May 10, 2006): Quick, name one highlight for the first quarter of year 2000?
Voltaire, the French writer and philosopher, once said, “History is filled with the sound of silken slippers going downstairs and wooden shoes coming up”.
Adrian Mastracci, investment counsel at Vancouver’s “fee-only” KCM Wealth Management comments, “Let's stroll leisurely down investment memory lane, back to the year 2000. For a retrospective look, perhaps, to reflect on Voltaire’s wisdom.”
Investors will recall that some market indices reached their tops in early 2000. Like the Dow Jones 30 crossing the lofty heights of 11,700.
Then they began their often rapid descent. Some falling harder than their peers into the firm grasp of a severe bear market. One that lasted some thirty months or so.
Today, memories of the bear have all but been erased from the minds of investors. We are approaching those high points again for stocks. Although, not for the NASDAQ.
Investors may be wondering what’s different now versus six years ago. An important question where answers are not always crystal clear.
In perfect hindsight
I'm going to take a stroll down the markets’ memory lane. Of course, with the magnificent assistance of my perfect rear view mirror.
A selective look at 10 things as a small sample of year 2000 versus now:
- A five-year ladder of Canadian bank GICs was yielding 5.5%. Today we hover around 3.1%.
- The US 10-year rate was about 6.7%. Today we are thrilled with 5.1%.
- Terrorism was an infrequent headline. Today we live with it.
- Housing prices were not a concern then. Today ”housing bubble” talk is commonplace.
- Income trusts seemed mere investment newbies then. Now they are fully grown.
- The US was running on surpluses. Now it's firmly entrenched in deficits.
- Oil prices were a bargain. Now we’re grappling with US$ 70 per barrel oil.
- China had begun to be recognized. Now it produces virtually everything we buy.
- Commodities were hardly portfolio staples. Now everyone is jumping on the bandwagon.
- US Fed funds rate was 6.5%. Today it’s 5%, up from 1% in early 2004.
What to take away
Say the investor’s opportunity cost of money was 3% per year since 2000. It could be argued that today’s Dow Jones index would have to be above 14,000 to compare apples with apples.
Similarly, an opportunity cost of 4% translates into the Dow above 14,800. While 5% implies the Dow at better than 15,700.
We’re not there today. In reality, investors may have reaped no return on the basis of this yardstick. Not to mention the adverse affect of the rise in the Canadian dollar on US investments.
Hence, those that invested heavily in equities since 2000 may have experienced a loss in some markets, after opportunity costs and currency adjustments. Not a terribly welcome outcome.
A little brainstorming
Investors can spend a lot of precious time looking back. I put forth these thoughts for deliberation:
- Investing is about finding a comfortable balance between incurring investment risk and reaping returns. There is no shortage of apprehensions going forward.
- Better management of investment risk ought to become a higher priority. A rest in market advances would not be surprising.
- One observation is that many investors now focus their attention on lower quality companies. However, the portfolio implications of this may be more drastic than expected.
- Investors want portfolio results in the short-term. The markets typically deliver them in the long-term.
- Investors with apprehensions don’t have to invest all at once. It’s quite acceptable to position the portfolio over a period of one or two years.
Nervous feelings often flow in the markets. Those zigs and zags are unsettling for many. Although, we’ve done rather well since 2000, all things considered.
Take a look back anytime. There are lessons in the investment history, but don’t dwell too long.
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