Golden Bells
Performance Anxiety"The King's Speech" is an award-winning movie about one person's stage fright that affected world events. A different kind of performance anxiety grips many investors today, also with potentially important consequences.
Reviewing accounts after three turbulent years, an old truism comes to mind: "Everyone always wants to do today what they wish they had done one year ago." Never has that been truer of us investors.
In December 2007, after a good year in the markets, investors around the globe wanted to take more risks and buy more condos and stocks. Many used too much debt and there were plenty of companies and government agencies to help them.
After 2008 the only thing people wanted to buy was motion sickness medicine.
Year-end 2009 saw more people begin to invest in stocks again.
Today, at the start of 2011, many people don't know what they want, but we all look at our account performance and want to see bigger numbers.
To approach a more rational, reasonable and responsible way of looking at things, let's revisit a few facts:
Losses hurt more than gains help. The 51% stock market loss from peak to trough (November 2007 to March 2009 - roughly 1,400 to below 700 in the S&P 500) has still not been recovered. Two years of good gains (2009 and 2010 - back a little over 1,200) have only gotten investors within 15% of where they were. Losing 50% then making 50% only gets you back to 75%. That's $1.00 to 50 cents to 75 cents. Hedging and conservative management should reduce losses in bad markets so we don't have as much to make up in the good times.
No one can predict the future. This is, on its face, true and, in moments of clarity, obvious. Yet, the investment industry has been built on the implication that guys on Wall Street can see things before they happen and then have the time to sell you the knowledge. To participate in up markets you have to already be in them. To mitigate losses in bad times, you must already have hedging techniques in place.
Sometimes we get punished for doing the right things. You hedge against bad markets and everything goes up. Think back for a moment to last summer. Even though the economy and the markets were showing signs of recovery, many analysts were warning us about a possible double-dip recession. We had just been through the worst month of May since 1941. May and June together saw a drop in the stock market of over 13% (source: BTN Research). As bad as 2008 was, we need to remember the second dip is always worse than the first. When you take steps to protect yourself, whether with insurance or hedges, you potentially give up some gains. I am happy to forego a little potential profit to not risk huge losses.
So, how do we measure how we are doing and know if our returns are ok? As you know, we always compare our returns to two things most of our clients will never own 100%: CDs and the S&P 500.
If you made 2% last year was that ok? How about 15%?
In both up or down markets, conservative growth, growth and income, income and stable value portfolios all fall between CDs and the S&P 500. The closer your returns are to those of CDs, the more conservative you were and results close to the S&P 500 indicate a higher risk approach.
In 2010 stocks did 12-15% and CDs did very little (about 1.5%). If you did 2-4% you beat CDs and were on the conservative side of things. Returns of 4-9% were results appropriate for balanced / growth and income portfolios. If you made 10% or more, you were definitely on a more growth oriented path. Over 15% denoted a greater-than-market risk aggressive approach.
Deciding how much risk to take is a combination of knowing what you need to meet your goals, but also knowing how much stress you can take. Anxiety creates bad decisions.
We should always be willing to reallocate our portfolios when needed. It can be bad, though, to chase returns. Any moves we make should be based on your personal situation. Jumping on the S&P 500 stock bandwagon just because it had a good half-year is not smart. Doing today what we wish we had done last year is no way to allocate assets. If you were conservative last year, what has changed? In 2008 many people found out they were not as aggressive as they had thought.
The only real financial security comes from abundance. There is no substitute for just having "enough." Understanding and managing investments is important but knowing and controlling ourselves can be a large part of achieving and holding onto those profits.
As 2011 unfolds, we look forward to a continuation of doing the right things: participating in the good times but never forgetting the bad.
Disclaimer for Market Commentaries with Index performance information only
This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed. Any opinions expressed herein are subject to change without notice. An index is a composite of securities that provides a performance benchmark for other funds and is not illustrative of any fund performance. Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested indirectly.
VIEW OUR GOLDEN BELLS ARCHIVES
What is Different This Time September 2011
Who is Atlas May 2011
Ball of Confusion October 2010
Into the Storm June 2010
Year 2009
April 2009
March 2009
Year End 2008
Halloween 2008
PryorMcCormick Investments
4000 Southlake Park, Suite 200
Birmingham, AL 35244
Securities and investment advisory services offered through Sterne Agee Financial Services.
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PryorMccormick is not an affiliate of Sterne Agee Financial Services.