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That brings us to the title today… Investors Flee While Dow Doubles: Three Years of Investor Suicide.
We went back and looked at the DOW back to March of 2009 when it was at its bottom, where it closed at 6547. Today the Dow is at 13,200, meaning during the three-year period it has more than doubled in value. The question is, what has the average investor done during that same three-year time period.

They have been selling out of stocks, and selling in large volumes… to the tune of 490 billion taken out of equity funds during those three years. That is almost a half $1 trillion of where investors are fleeing equities and moving money to fixed income.

Notice what we see here side by side. On the left we see the Dow more than doubling in value during the three-years. Meanwhile on the right, we see the large red bars going down representing investors selling out US equity funds. Something else that I noticed that a significant, when there is a small correction of the DOW on the left, that triggered a significant selloff from equity funds on the right.

But this has consequences. In a Smart Money article by Brett Arends titled “Main Street’s $100 billion Stock Market Blunder” studied investor behavior from October of 2008 through February of 2012. By measuring the amount of money taken out of equity funds, as well as equity returns during that time, he found average investors collectively lost more than $106 billion during that time… all due to market timing.

We are proud to say that here at Financial Harvest Wealth Advisors, every single one of our investors that have been with us through the financial crisis that began in October 2008 are all now positive… Meaning they have more than recovered [since the beginning of the financial crisis]. They were not a part of this $106 billion mistake made by most equity investors. Remember your financial survival and freedom is on the line, invest wisely.

What the Wall Street Journal article pointed out was that if one went back to the beginning to when the Dow was constituted in 1896, and re-invested dividends, the index would have grown to 1,339,410, or 100x higher than without dividends reinvested!

This is significant for two reasons. First, most of the time when the Dow is quoted, it is price only. It does not include reinvested dividends, which is what our investors do. Second, the article looked at the real growth – which is growth after inflation – of $1 invested in 1896 vs today for the Dow. After inflation, with dividends reinvested, the $1 investment grew to almost $47,000! That is an increase of wealth of 47,000 times, after inflation!

You may say, “David, I don’t have 114 years… what is a more relevant for me?”

To produce a more relevant scenario, I looked at recent 30 year rolling periods from 1927 through 2011. The worst performing 30-year period did 5.9% annualized for the Fama/French Small Cap index, inflation adjusted. The best performing years started in the middle of the depression in 1933. Investments in the small cap index grew at a 14.5% annualized rate of return after inflation. Most recently, from 1982 to the end of 2011, the annualized return on the small cap index was 8.4% after inflation. This percentage is brought up to 11.4% by adding in 3% inflation as an example.

In terms of real dollars, this means that if $1m was invested in 1982, it grew to $11.2m! This shows tremendous growth by owning equities. This is 10x the real purchasing power capacity by owning small cap stocks over the last 30 year period, but only if these 4 steps were taken:
1. Own equities
2. Tilt toward small and value companies
3. Stay fully invested
4. Buy low – sell high

Know your investment strategy . . . harness the entrepreneur thinking and innovation, and the growth potential of equities. Remember, your financial survival is on the line.

I decided to go back to learn something about how markets
respond to financial crisis [in the past]. 
As a result, I think you will agree that there is great reason for cheer!

Considering the portfolio that we are utilizing: notice that
we have it diversified in 60% equities, 40% bonds.  The 60% in equities is diversified not only
here in the United States in small, microcap and small value positions, but
also in International value and [international] small value positions as well.
[Please email me if you would like the model portfolio allocation.]

Beginning with the October 1987 crash, notice there is a
total return at 1 year, 3 years, and 5 years later.  Not only are all 3 of the returns positive,
but after 5 years there was an almost 60% return.  Meaning, if you invested $1m in the middle of
the 1987 crash, 5 years later your $1m grew to nearly $1.6m.

Fast forwarding a bit to the August 1989 Saving and Loan
Crisis: again we see after 5 years there was substantial appreciation of almost
50%.  In September 1998, the Russian
Crisis occurred, as well as the Long Term Capital Management collapse.  Notice once more that if you invested your
capital in the midst of the crisis, 5 years later you would have seen an almost
50% return yet again.

March, 2000 brought the Dot Com crash.  If your $1m was invested in a diversified
portfolio, after 5 years your $1m would have grown to $1.5m.

This next scenario is perhaps the most shocking.  September 11, 2001. If you invested $1m in
the middle of September 2001, during the terrorist attack on the United States,
5 years later your portfolio would have grown to almost $1.85m – a gain of roughly
85% during the subsequent 5 year period.

As a result of the most recent crisis, the bankruptcy of
Lehman Brothers in September 2008, 3 years out we can already see positive returns
from the equity markets.  The question
is, though, what will the next 2 years bring? 
On average, over the last 5 financial crises, if you were fully
diversified in the portfolio discussed, there has been an approximate 50% total
return [during the following five years.] We’ve only captured about 10% of
that, which means that the next 2 years [statistically speaking should bring
approximately] another 40% return!

Reason for cheer? Absolutely! Currently, the earnings to price
ratio of the S & P 500 – the greatest 500 companies in the word – is
8%.  Meanwhile, the 10-years Treasury
bond is only yielding 2%.  That 8%
earnings per price ratio has not been this high since 1981 – the last 30
years.  Also, that ratio of 8% earnings
yield versus the 2% bond yield – that multiple of 4 has NEVER occurred in the
history of investing! This is how undervalued equities are right now and how
overpriced and overvalued high quality bonds are.  The reasons lies in the moods of fear and
pessimism, but once [investors move to exploit the great valuation divide,]
look out for equity markets!

Know your portfolio [strategy, and know your
investment principles.]  Make certain your
properly invested to capture these market returns.  As I always conclude, your survival is on the
line. ]]> http://financialharvest.com/financialharvesttv/2011/12/16/reason-for-cheer/feed/ 0 http://financialharvest.com/financialharvesttv/2011/11/11/superior-investing-during-the-eurozone-crisis/ http://financialharvest.com/financialharvesttv/2011/11/11/superior-investing-during-the-eurozone-crisis/#comments Fri, 11 Nov 2011 21:11:40 +0000 David Witter http://financialharvest.com/financialharvesttv/?p=513 Katie and I have noticed that there have been a lot of questions in the marketplace concerning how to prudently handle the Eurozone debt crisis.

 Let’s begin with fixed income.  When we work with our clients and investment portfolios we have criteria and standards for what countries are eligible for owning their government bonds.  Here is a list of those eligible countries:

Australia

Austria

Belgium

Canada

Denmark

Finland

France

Germany

Japan

Netherlands

New Zealand

Norway

Sweden

Switzerland

UK

United States

Notice which countries are missing.  Notably, Greece, Italy, Spain, Portugal and Ireland. This result is due to our fundamental principles for owning fixed income.  What is the purpose for owning fixed income?  First, it is to reduce volatility, or to reduce risk, in your portfolio because they have low correlations [with equities].  In other words, bonds tend to go up when stocks or equities are falling.  Second, there must be something to rebalance against when equities fall.  If equities are falling and we own high quality government bonds, we can [sell those bonds] to buy more equities. 

 To meet those purposes, there are four necessary criteria and standards [to be met]. First, government bonds only – no corporates.  In 2008, corporate bonds fell just as much as equities did [increasing risk and providing no opportunity for rebalancing].  Secondly, those government bonds should also be high quality – double AA rated or higher with short maturities of 5 years or less.  Lastly, global diversification [reduces risk] as US government bonds trade differently from other international government bonds. 

 Now, let’s speak a little about equities.  When you add up the market capitalization of Greece, Italy, Spain, Portugal and Ireland, it represents roughly 3 .5% of all international stocks. When we speak with our clients, the narrative becomes even broader because we have them in globally diversified portfolios where the market capitalization is allocated roughly 60% to the US, all countries excluding Greece, Italy, Spain, Portugal and Ireland representing about 39%, and those 5 countries in question combined only representing about 1.5% of their equity portfolio.  It makes one wonder, “Why all the hype in the media if people are prudently diversified?”

 What does this all mean to you, the investor?  Producing wealth requires a fundamental strategy.  Number 1 is to own equities.  Only equities will protect your purchasing power over long periods of time.  Number 2 – stay fully invested.  There will be downturns and down markets, but the only way to capture the upside and the risk premium for owning equities is to stay fully invested.  Number 3 – is to globally diversify.  You want to own the entrepreneur power and thinking of literally tens of thousands of companies scattered across the globe as opposed to owning only a handful.  Last, but not least, is buy low and sell high.  The systematic way to do that is to rebalance your portfolio on continuous basis.  These are the fundamental strategies to employ.  Remember, your survival is on the line.

The media would have you notice the more sensational headlines about stocks tumbling 2% in one day; however, there are also articles about the markets “fending off the bear”.  The media will draw your attention headlines that have you watch more to then sell more advertising.  But you, as an investor, need to have knowledge of what to notice, observe and assess in order to take care of [your savings & investments], rather than the media hype.

What happened most recently?  From October 3^rd to October 21^st, a 3 week period, we see that the DOW and S & P 500 were up over 11%.  For the year, the DOW is up 2% and the S & P 500 is roughly flat.  There is a quote in the Wall Street Journal that speaks along these lines.  “…there were people who were out of the market who are now saying, gee, I just missed 10% up,” said Mr. Marshall of Knight Capital.  “And I can’t afford to miss the next 10% move.”

Wrong, Mr. Marshall!  You can’t afford to miss ANY 10% by not being fully invested.  Missing 10% means that if you were out of the market and missed the last 3 weeks, with $1mil invested, that’s $100k.  The opportunity costs don’t stop there, however.  In 10 years, at 7% returns, the money doubles meaning you missed $200k, and in another 10 years – 20 years total – you’ve missed out on $400k.  That is capital that could produce an additional $1,300/month in retirement income to pay for healthcare, food, rent or utilities.  In other words  . . . your survival.

You need to know that intra-year falls are common and should be expected.  If you want the returns from equities, then you need to be willing to accept the risks of equities.  In 2009, there was an intra-year decline of 28%, but the year ended up 23%, which is a 50% swing in 1 year.  More recently, in 2010 there was an intra-year decline of 16%, but the year still ended up 13%, which again is an upward swing of almost 30% in one year.

 You must know what to notice, what to observe and what to assess in order to get superior results with your investments.  You also must maintain the long term moods appropriate for gaining wealth.  Resolve, discipline, passion and ambition will help you keep centered in the investment principals that win in the long run. 

Finally, stick with investment practices such as rebalancing, owning equities, staying fully invested and diversifying across multiple market segments across the globe – these practices lead to appropriate care for your survival.

Looking at a case study going back to 1^st quarter 2009, [we see the first quarter of 2009] was down about 12%.  The 2^nd quarter followed with a plus 15% and the third quarter was another plus 15%, while the last quarter ended with roughly plus 6%.  Cumulatively, this amounts to an almost 40% rebound following that 1^st quarter loss of almost 12%. 

Reflecting back to 1^st quarter 2009, no one was talking about a potential rebound or anything positive about the economy [or equities].  All that was heard was “doom and gloom”, and yet strong performance bounced back.  We can always expect a return; we just can’t predict when exactly that will occur.

Another thought I have about the current [media entertainment] talk is, “where is this recession they keep referencing?”  Manufacturing, production, employment activity and most recently, construction spending are all up.  Anything above a reading of 50 indicates economic growth, not construction.  This “recession” is simply not a reality, [but rather entertaining hype to keep viewers watching.]

Lastly, producing wealth does have some requirements.  First, an investor has to have appropriate intentions in order to produce enough wealth to protect purchasing power throughout 30 years of retirement.  The second requirement is an appropriate mood.  Long term investment intentions require a mood of resolve, dignity, [maturity, responsibility] and peace.  Finally, producing wealth requires superior practices such as staying fully invested, [rebalancing,] owning equities, and developing a well-diversified, strategically allocated portfolio.  Remember, hold your intentions, moods and sound practices to produce the wealth that you need.

The most recent stimulus for the austerity press is a result of the current situation in Greece, where they are in default again, or at least, there is a fear of default.  This should not come as a surprise.  Since Greece’s independence in 1829, the country has been in default more often than they have ben current with their debt.  Also, keep this in perspective. Greece only represents a fraction of 1% of the world GOP.  Consequently, their situation has little impact on the global equity markets.

Austerity, by definition, is when the government reduces spending as well as benefits and social programs.  It appears that we have austerity measures coming here in the United States.  There are two very important consequences of this action.

First, historically equity markets tend to increase after austerity measures are passed.  The reason for this is that when the government gets their financial house in order, it tends to leave more capital and resources in the private sector [increasing growth, innovation and production].  Second, and most significantly, when social programs in the United States are reduced, for instance Social Security and Medicare, it requires you to be able to produce more income from your portfolio.  You need more retirement income to make up the gap from the reduced programs.  In order to produce the retirement income necessary for the remainder of your life, you must have more savings and investments.

To accomplish this, one must [acquire] superior knowledge of [investment strategies and practices].  Without them, you will not be able to produce the [savings and investments] needed to last throughout 30 years of retirement while making up the shortfall created by austerity [measures taken today].  Work with an Advisor that possesses [this] strategic knowledge and, remember, your financial survival is on the line.

However, reflecting on past volatile days in the market such as October 19, 1987, otherwise known as “Black Monday”, there was a 20% fall in just one day.  But, if you adhered to your investment strategy, in 1 year the market was up 25%, 13% in 5 years (annualized) and 10 years later the market was up 15% annualized. 

As another example, in 1962 there was a 7% sell off in 1 day.  Likewise, in just one year, there was a 25% increase, 10% over a 5 year period and over a 10 year period the market was up roughly 7% annualized per year. 

More recently, in October 2008, the middle of the financial crisis, there was a 9% sell off in 1 day. But notice that in 1 year, there again was a rebound of 21%. 

Further, if you look at the worst 15 days in the S&P 500 since 1950, the average downturn was approximately 8%. However, if you stuck with your investment strategy, within 1 year on average you were up 21%, on 5 years up roughly 8% and on 10 years the average is around 10%. 

To illustrate, $1mil invested would have increased to $1.21mil within 1 year.  On 5 years at 8% annualized, the $1mil would have grown to $1.47mil and in 10 years at 10% it grows to $2.59mil.  If you did not stay with your strategy, and got out during that time, you would have missed this upside.  This is just part of the story though.  If you were globally allocated, the story is even more positive.  

Currently, a rather surprising fact is that the yield on a 10 year US Treasury bond is 2.1%.  Comparatively, the S&P500 current dividend yield is 2.12% – higher than the 10 year US Treasury bond.  This is a thought provoking realization in terms of what is going to produce more return for you in 10 years.  Once again, know your strategy and stand by the prudent investment principles that always win in the end.