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| Adrian Mastracci, portfolio manager at KCM Wealth Management, says “This is a great time to get the financial house in order. That is, when prices are high." |
Vancouver, BC (April 18, 2007): At times, just let the mind wonder and explore the markets.
An unknown author once said, “Each time history repeats itself, the price goes up.”
Adrian Mastracci, fee-only portfolio manager at Vancouver based KCM Wealth Management comments, with hindsight and some foresight, on living with the markets.
First, a less than scientific tally. My observation is that, over long periods, the markets spend roughly 2/3 of the time going up and 1/3 going down. However, investors remember more bears than bulls.
Let’s take a few moments for a retrospective look at the last 10 years. I’ve selected the Dow Jones Industrial Index (DJII) for reference, as information is available on it for over 100 years.
Why 10 years you ask? It’s a sensible long-term investing period and it’s reasonably fresh in our minds. Note that the numbers that follow are rounded as exact accuracy is not required.
10 years of hindsight
Have a peek at the accompanying data for the DJII. It started out near 6,600 in the second week of April 1997, rising to the 11,700 level in early January 2000.
It proceeded into a bear market till October 2002 when it hovered in the 7,500 ballpark. The bulls then took charge and today we’re near 12,800. Quite a roller coaster for 10 years.
Had investors simply bought the DJII in April 1997 and forgotten it until today, they would have enjoyed nearly a 7% annual compound return. Had they sold their positions in January 2000, the return would have been over 22% per year.
Now for the crunch. Had they bought in January 2000 and sold in October 2002, they would have lost almost 15% per year. Instead, had they sold that January 2000 position today, they would have made almost a paltry 1¼% per year. Neither one turns heads.
Of course, the smart money would have bought in October 2002 and sold today enjoying over 12% per year. Oh yes, the smart money also invested in T-Bills from January 2000 to October 2002.
Around the curve
The DJII return has been nearly 7% for the last 50 years and nearly 5½% for the last 80. Investors have weathered 23 bear markets in the DJII since the year 1900. A bear is a drop of 15% or more.
Hence, we’ve had a bear market, on average, nearly every 5 years. Typically lasting from 3 months to 3 years.
Our current bull market is seemingly still very spry after 4½ years running. The US has been enjoying a 6-year economic expansion.
However, investors may be facing some potential slippery slopes. We have rising energy costs. The US housing sector is in a slump. Corporate earnings are expected to slow down. Business investment is a little sluggish. The face of inflation peeks every so often.
Trade gaps are still solid in the red. The US Dollar has been heading lower. Job creation has not been stellar. Some employers, like Citigroup, are shedding thousands of employees. US GDP is expected to check into the low 2% ballpark.
So you ask, why are the markets full of euphoria? They seem to be priced for perfection, yet many investors are tripping over themselves. Rushing to pay higher prices. What do they know?
Markets may be efficient, but not necessarily always rational. The key for each investor is to structure the portfolio so that it makes sense for the particular situation.
Now the foresight
Investing tries to achieve a comfortable balance between incurring investment risk and reaping returns. I suggest this sensible approach for investors:
- Expect nervous sentiments and fears along the way to where they want to be.
- Management of investment risk ought to become portfolio priority one
- Try not to incur a large loss – a comfortable mix is a good start.
- Learn to take some profits when markets are high – like now
- Broad diversification and a sprinkle of quality help smooth the bumps.
Investors want portfolio results in the short-term. Markets typically deliver in the long-term. Don’t get married to the market highs. The last correction was less than two months ago.
This is a great time to get the financial house in order. That is, when prices are high. Making sure that the portfolio asset mix is reflective of the personal comfort level with equities.
Investing is a marathon of experiences. Like the Boston marathon, investors need plenty of stamina to cross the finish line.
I welcome your comments.
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