March Madness
It is the time of year when half court buzzer beaters turn unknown players from small schools into instant, if momentary, heroes. The NCAA Men's Basketball Tournament, also known as March Madness, is legendary for great upsets, heart stopping finishes, and underdog "bracket busters." This year, pre-season favorite, North Carolina, advanced through the field, winning every game by 12 points or more en route to the championship.
This March, the madness was not on the road to the "final four," it was on a road called Wall Street.
On March 9th, the Dow Jones Industrial Average reached a new "bottom" in this current bear market. On this date, a CNNMoney.com headline proclaimed "Economy worst since Depression." A Wall Street Journal headline asked "Dow 5000? There's a Case for It." BusinessWeek even thought it appropriate to reprint an article originally published in August 1979, titled "The Death of Equities."
From the previous market bottom on November 20th, through the remainder of 2008, the market was up between 13% and 25% depending on the asset class. In our year end comments we wondered if that was a "fools rally," as many in Wall Street call a bounce before an even larger decline. From the beginning of January, the market began to decline. By February 18th, the DJIA fell below the previous bottom set on November 20th, barely six weeks into the New Year.
The decline continued, bottoming on March 9th. The decline was so severe, that the year-to-date returns ending March 9th were almost as bad as they were for the entire year of 2008. On that date, however, things changed once again. From March 9th to the writing of this communiqué, the global market has been on a major run, a move large enough to satisfy the classical definition of a Bull Market. On March 24th, the Wall Street Journal seemingly changed its tune with the headline, "All Hail the New Bull Market!" The month of March alone had market movements that fit the classic definition of both a bear and a bull market. March Madness, indeed.
The table below shows the returns of some DFA funds that have at least 10 years of historical data. These are very representative of returns around the globe of the major asset classes.
As you can see, the year began with enormous losses. In fact, if 2009 ended on March 9th, the year would be considered one of the worst years on record. What is amazing is what happened next. The next four weeks generated returns so strong, that most of the asset class year to date losses were pared down to single digits, and the Emerging Markets even posted gains for the year.
Is this just another fools rally? No one really knows. Certainly, on the evening of March 9th, no one was predicting the DJIA would go on a 22% run from March 9th through April 3rd.
Despite a tumultuous start, the month of March was one of the top 5 best months for many of the asset classes noted above. But, this is just part of the story. Equally interesting, had the monthly returns stopped on March 9th, many of the same funds would have experienced one of the top 10 worst months in their history.
While we never predicted, or even expected, a market this volatile, we are all still okay. Our investment strategy is not based on predicting these types of market movements. The core of our strategy is the fundamental belief that these types of markets are unpredictable and inevitable. We did not go into this current bear market without a plan. We have a plan, and we have been executing that plan for all of our clients.
For those who are retired, and the investment portfolio is providing a portion of your income, our plan is to use the fixed income investments to maintain your cash-flow while the market rides through this period. We are keeping the equities in the portfolio balanced among their respective asset classes, but avoid the sale of equities at these low prices. When possible, we are realizing losses for tax purposes, which will allow us to keep the equities in balance going forward in a more tax efficient manner.
For clients who are not retired or using the investments for current cash flow, we are looking to the fixed income portion of the portfolio to buy additional equity securities at sale prices. We are doing this keeping the overall allocation between the different equity asset classes in balance, and realizing any tax losses we can along the way.
Additionally, we are constantly evaluating the current market condition to see if anything is happening to cause us to modify our current strategy. Our goal is to continue a long term, academic approach to our overall investment strategy. To date, nothing has occurred to cause us to believe the principles of Modern Portfolio Theory are no longer valid. These concepts are constantly tested and improved upon by the markets and academia. Our commitment to our clients is to stay abreast of all the new research and make portfolio modifications as appropriate.
Earlier this year we provided information about a research paper I wrote that explored historical returns following major market crashes. Recently, Dimensional Fund Advisors published a research paper that looked at the market returns after major financial sector crises around the globe. In the near future, look for us to host a webinar summarizing the results of DFA's findings and some other market observations.
This recession has been difficult for all of us. No one likes to see the value of their investments decline as they have. While we spend a good deal of time discussing the markets, it is important to frame the conversation in one's own personal goals. In our view, the greatest risk that our clients face is not the occurrence of a Bear market and the potential decline in portfolio value that may come with it. Rather, it is the inability to meet your goals. Our efforts are focused on doing everything that we can to ensure that your goals are fulfilled.
We truly believe in our tagline, "where prosperity finds peace of mind." Please, do not hesitate to contact our office to discuss your situation.
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