September 22, 2009
One year after the crash, who were the big winners?
A year ago, Lehman Brothers had just gone bankrupt changing a weak market into a crashing one. My headline in my October 14, 2008 newsletter, “What the Heck Was That”, summed things up pretty well.
This past year, investors holding onto stock investment saw life changing losses. At the bottom, last March, the average loss, represented by the S&P 500 Index**, was a whopping 56%. Some unlucky souls lost everything. The lucky index investor still needs a 46% gain from September 18th levels just to break even.
Even bonds, normally a safe haven in tough times, saw huge losses as the credit quality of every institution was questioned.
The only bonds that did not see principal losses were those of the US Government, but with T-Bill rates dropping below zero at one point, Treasury investors may not have felt like winners either.
The Hulbert Financial Digest, which has rated financial newsletter writers for 30 years reports that 83% of newsletter writers were sporting losses for the year from September 2008 to August 2009.
The current Morningstar Managers of the Year lost 20 to 30% for their shareholders in 2008.
And on September 17, 2009, InvestmentNews announced that their readers, mostly brokers and financial planners, had bestowed the title of Most Respected Fund Family of the past year to American Funds.
Considering that their 13 stock funds lost a stunning 52.51% during the crash, the fact that American Funds commands such respect among practitioners is a sad, sad statement.
It seemed like there was just no place to hide this past year – unless you were a client of Hepburn Capital.
My clients have had the good fortune to survive the crash and its aftermath. Four out of my five main strategies, representing 95% of my client assets are at or closely approaching new all time highs as of September 18th.
I attribute much of this good fortune to the tools I gathered in my 10 years as a member of the National Association of Active Investment Managers. NAAIM is the only organization I know of where one can rub shoulders with other active money managers, and I am grateful for the opportunity to learn from them.
And you should be grateful, too. It is your money that NAAIM’s expertise helped save and grow.
The headline question was “Who are the big winners?” Just about the only winners I know of over the past year or two are active money managers – and their clients.
Please tell your friends that if their adviser is not a NAAIM member, they might do well to talk to one that is.
Riddle Question
The man who invented it doesn’t want it. The man who bought it doesn’t need it. The man who needs it doesn’t know it. What is it?
Riddle Answer
A coffin
Meet our newest staff member
Operations manager, Yvette Romero, has a new puppy, named Memphis, that has become a regular visitor around the office on Thursdays.
Memphis is a 3-month old pure-bred boxer, and he is beautiful with a capital B.
Come on by and scratch his ears if you’d like.
Membership has its privileges.
What Part of Traditional Financial Planning Advice Should You Run From?
I see many prospective clients with financial plans done by ordinary financial advisers, some with well recognized names. When I ask “How’s that working for you?” I usually see a shrug of the shoulders and get a comment like “I’m down just like everyone else is.”
Misery might like company, and losing money is certainly miserable, but losing money is not inevitable just because others do it. 
Losses should not be acceptable. The problem is many investors are not equipped to identify the exact nature of their problem, and perhaps unknowingly go back to the person who caused their problem for more advice.
If you, or people you know, took large losses the past two years, I’m pretty certain I can tell you why.
The one item, when missing from an investment plan, that causes more losses than anything else is lack of diversification, but not in the way you might think. Let me explain.
Most of the traditional financial plans are based upon a Nobel Prize winning idea called Modern Portfolio Theory. MPT suggests that for any level of risk you wish to take there is a combination of investments that has historically delivered the best reward.
Financial plans based upon MPT therefore evaluate your comfort with risk and based upon long-term returns declare “this is the best combination of investments for you. Buy these couple of funds and that is all you have to do. The computer says so.”
Ironically this “modern” theory was developed in 1952 and while it may have worked well back then it has been a disaster for the past 10 years or so.
But old habits are hard to break and financial plans based upon MPT are such great sales tools that brokers and planners still offer them up even though investors who have followed them have taken staggering losses.
The flaw is that MPT based plans lack diversification by strategy. They totally ignore the fact that the great American investment creed of “Buy low, Sell high” has two parts. MPT makes no provision for selling. Ever.
Typical investment plans allow for two levels of diversification. The first is among investment categories such as stocks and bonds, and the second, within these catagories, is don’t own one stock, own a bunch. Diversify.
But good money managers know there is a third level of diversification, too. Diversification among different strategies.
Some money managers only know one strategy. If all they use is buy and hold, your investment plan will work about half of the time and the rest of the time it may be a disaster. Any single-strategy investment has this flaw.
To control the risk of being caught in prolonged market declines one needs a “sell strategy”. 99% of all financial plans totally ignore this vital part of a plan and end up putting all of your eggs in one basket, strategy wise.
The investment plans I am most comfortable with use active management just like another asset class. Some investments lend themselves well to buy and hold, others don’t. It is extremely risky to have all of your investments held in buy and hold.
I would recommend every investor have a plan that includes a significant portion of actively managed investments. Ask your current adviser what his sell strategy is. If he doesn’t have a clear one, move on.
The only thing we can count on in this business is that change is inevitable. As an investor, if you are not ready for the markets to change you may have to pay heavily for that oversight.
At Hepburn Capital, all of our strategies Adapt to Changing Markets®. Call the office at (928) 778-4000 if you would like to see how a sell strategy could have helped you last year.
Consolidate IRAs and Retirement Plan Accounts
Many clients come to us with multiple IRA accounts that are not well coordinated.
The laws changed a few years ago to encourage consolidation of multiple retirement accounts into a single, self-directed IRA. We can now make many pieces of paper go away for you with an IRA consolidation plan.
If you have an old 401k, IRA, 403b, TSA or any other of the alphabet soup of retirement plans, let us consolidate them for you into a single IRA.
Not only will you find it more convenient to have fewer pieces of paper in your life, you will have fewer account fees, one of the largest selections of investments anywhere, and no commissions to pay when you invest at Hepburn Capital.
And if you are considering converting to a Roth IRA during next year’s window of opportunity that I mentioned in my last newsletter, this will be part of the process anyway.
Call the office to start consolidating your IRAs now, and avoid the rush.
The Amazing Market
The stock market continues to defy experts by continuing to go up when it looks like it is running out of gas. I can’t argue with the money being made, maybe this is another bull market in the making. That would be nice.
But, make no mistake, making new investments after a 50% run up in the market is a very high risk entry point. We should try to buy low, not buy high.
The risk of a market decline is very high right now. That is the bad news. The good news is that I don’t think it will be a severe decline such as we saw last year, but it still could be expensive if you are not prepared for it when it happens.
My concern about a market decline began building in August, and we raised cash to about 30% in our growth accounts. I put that money back to work a couple of weeks ago, but not into the stock market. I bought government bonds since they were growing in value similarly to stocks, but did not entail stock market-like risk.
This may be a good time to own stocks, but I don’t think it is a good time to be buying them.
What’s Going On In Your Portfolio
Our Flexible Income* accounts remain fully invested in high yield bonds. Some derisively call them junk bonds and turn their nose up, but junk has enjoyed a once in a lifetime run this year and the money seems to come easy. Our Flexible Income model* is up 27.78% year-to-date. Someday this great run will end, but for now, just sit back and enjoy the ride.
Our Careful Growth* accounts have been keeping up with the S&P 500 Stock Index** very nicely the past month or two but are only 40% invested in stocks, keeping our risk low.
Right now we own stock funds focusing on International Value, Australia, Latin America, Mexico, Micro-cap (very small companies) and small company value stocks in the US. The rest of our portfolio is junk bonds and US Treasury bonds. The Careful Growth* model is up 9.84% year-to-date.
Our Balanced* strategy, a 50/50 blend of Flexible Income* and Careful Growth*, represents our “average account” and is up 18.81% year-to-date.
It may seem odd that the more conservatively managed Flexible Income* strategy is outperforming the Careful Growth* strategy, but in tough times, income normally outperforms growth. And since the year 2000 times have been tough in the stock market. The S&P 500** is currently 30% below its level of September 2000.
But it won’t always be this way. In more normal times, growth can be expected to outperform income, perhaps greatly so. That is why it is important to continue to diversify rather than pour all of your money into what is hot at the moment.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. Use of inverse investments for hedging introduces the risk of loss in both up or down markets. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Information in this newsletter is derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitutes a solicitation for the purchase or sale of any security.
