Heroes One Day, Morons the Next…

    Heroes One Day, Morons the Next…

    The life of a financial advisor is kind of like a roller coaster. When the markets are favorable, you are seen as a genius. When they aren’t, you’re suddenly clueless (or worse).

    We are huge proponents of diversification, as you know. Over the longer term, it has proven to deliver pretty darned extraordinary results for patient investors. Yet, over shorter time periods, diversification has been known to cause a fair amount of agita. This year is an example. While the S&P 500 is up a couple of percent this year, the international markets are down between 3-8% through June, which has acted to reduce total returns in client portfolios.

    Here’s one of my all-time favorite charts that provides a “Checkmate” case for why we don’t think you should let current portfolio underperformance bother you in the least. It compares the performance of the S&P 500 Index (the pathetic little green line at the bottom), with a globally diversified equity portfolio. Since 1970, the diversified global equity portfolio has outperformed the S&P 500 by a factor of FOUR. Yes, you are reading that right. A dollar invested in the S&P 500 in 1970 grew to $122 but the same dollar invested in the diversified global equity portfolio grew to $477. It’s always interesting to me how the media and many people who consider themselves great investors seem to be mesmerized by the S&P 500 index as if it’s the Holy Grail of investing, when in reality investing in that index is like trying to invest with one hand tied behind your back. Interesting, isn’t it?

    The chart always braces me with increased confidence during times of underperformance, and I hope it gives you a similar boost also.

    Here’s another interesting chart, showing a blue line of the performance of the S&P 500 since 1870. Looking at that line by itself, it really is hard to imagine why people can get so distraught about investing in equities, isn’t it? The red line provides the answer. This shows rolling five-year cumulative annual returns of the index, with dividends reinvested.

    For example, look at the year 2000. The five-year total return of the S&P 500 was +25.05% per year! By 2009, it had dropped to -8.12%, and through June of this year, it has been +11.66%.

    The takeaway for me is, while these returns are certainly interesting to look at, in reality recent performance numbers are absolutely meaningless in determining whether you are “doing well” or are on track to achieve your investment objectives. Had you taken the kinds of actions people typically take, based on recent  performance, you would have bought even more stocks in 2000 and cashed out in 2009; exactly the wrong things to do each time!  The truth is the bad times are simply brief times to be tolerated, not action items calling for a response. As your advisor, we use these opportunities to add to your stock holdings and if you are able, they present great opportunities for you to continue adding new money to your investments.

    I hope you feel a little more educated and inoculated from the useless pablum of market predictions and scare tactics that are routinely dished up by the media. To be successful in investing you need only four things: capital to invest, an understanding of long-term market performance, time, and patience.

    Have a great summer everyone!