The Markets Generally
After an enormously volatile September, the stock market lost substantial ground, with the S&P 500 Stock Index declining 8.4%* for the quarter. The general bond market also dropped, but very slightly — the Lehman Aggregate Bond Index decreased 0.5% over the last three months. Among the “alternative” asset classes, commodities were down substantially on the quarter, giving back almost all of their gains for the year, while domestic real estate did the reverse, making up almost all its losses. International investments did poorly across the board, as the dollar strengthened against key foreign currencies.
Year-to-date, the S&P is down 19.3% (its worst first-three-quarters since 2002), while the Lehman bond index is up 0.6%. Accordingly, the broad blended benchmark returns — against which to compare your own year-to-date portfolio returns — are all considerably negative: -5.3% for conservative portfolios; -9.3% for moderate; and -15.3% for aggressive.
Your Portfolio
For the year so far, unless you are one of a very few special cases (which we will address with you separately), you are doing materially better than your benchmark, and better than the vast majority of investors out there. That is primarily attributable to scientific asset allocation and disciplined rebalancing, which systematically exploits volatile environments such as this. You are surviving this market turmoil with only modest damage,while being fully invested, the importance of which we describe below.
Observations
The last few weeks have been truly momentous. Long-standing bastions of the financial services industry have disappeared. The federal government has interceded in the private sector to a degree not seen in decades. There is widespread worry and uncertainty in capital markets worldwide. That’s the bad news. The good news? Things have been a lot worse before, and they’ve always gotten better — much better. Think of bear markets as temporary interruptions to a permanent upward trend. There is nothing about this bear market that would indicate a different outcome, no matter what you may hear from those with short memories or no real experience.
As Peter Lynch has famously said, more dollars have been lost by people trying to avoid bear markets than in the bear markets themselves. Cashing out in the current market simply means selling at a low — never a good idea — and leaves you with the dilemma of trying to “market time” your re-entry — which is a loser’s game. You don’t want to be out of the game when the inevitable rebound occurs.
Here’s a bit of perspective. The worst one-day point decline in the Dow Jones Industrial Average happened a few days ago — a 777.68 drop on September 29. But in percentage terms, that 7% fall was nowhere close to the worst; for example, the 508-point drop on October 19, 1987 was 23%. And since then? The total return on the Dow, through the quarter just ended, has averaged more than 11% a year since that dark day almost 21 years ago. Maintain your patience and fortitude — they are traits that will continue to make you wealthier than most.
* We use “total return” data to express benchmark returns, which assume the reinvestment of all investment income.
Please remember to contact Brinton Eaton Wealth Advisors if there are any changes in your financial situation or investment objectives, or if you wish to add to or modify our investment management services. A copy of our current written disclosure statement as set forth of Part II of Form ADV continues to remain available for your review upon request. You should not assume that any discussion or information contained in this letter serves as the receipt of, or as a substitute for, personalized investment advice from Brinton Eaton Wealth Advisors.
