Wednesday, August 10, 2011

Is This Game Getting Harder To Play?

In times like these it is tempting to think that things are worse than they have ever been. I ran across an article the other day that listed the biggest one day declines and advances in the stock market since 1950. During this 61+ year period there were 41 entries in each category with the downside cutoff being a 4% move, meaning any single day market move either up or down of less than 4% was not on the list.

I started in the investment business in 1984, 27+ years ago, yet have experienced 34 of the largest 41 single day advances and 37 of the largest 41 single day declines. 26 of the advances and 25 of the declines happened in the decade from 2000-’09, with 2 of each, ups and downs, during the current decade. So by this crude measure, single day stock market moves, the ‘00s were much more volatile than previous periods.

To make matters worse, the ‘00s also provided the lowest stock market returns, as measured by the Standard & Poors 500, of any decade including the 1930’s. Simply put, there has been much more market risk and much less market return since 2000 as compared to other periods. A further challenge is that during the best and the worse periods in the stock market, all stocks tend to move together, limiting the benefits of diversification.

Moving on to the fixed income side of a balanced portfolio, the last decade’s returns have been record breaking positive. This has provided a welcome boost to performance during the period. But starting from the current historically low interest rate level, a repeat performance is impossible. As such, bonds and money market investments provide a safe haven parking place only, and have little potential to help one meet their investment goals.

In closing, the present market environment is tougher to manage due to the above referenced issues, and many I did not touch on. However, patience to wait for opportunities will be rewarded, even if it means suffering periods of weaker returns with large amounts of cash earning little to nothing. Thanks for your patiences.

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