Message from the CEO: Lessons Learned During the Loss Decade
To put it mildly and simply, 2009 was a challenging year to be an investor. But as difficult as that was to endure, the experience of the past decade was, arguably, even worse. Since 1999, the United States has endured two wars, two recessions, 9/11, and the worst natural disaster in our nation’s history – Katrina – which almost completely wiped out a U.S. city. As if that weren’t enough, a series of financial shocks greatly tested investors’ faith in the integrity of the markets, including pervasive corporate accounting scandals, significant regulatory lapses that contributed to the demise of major financial institutions, and the discovery of some of the most extraordinary Ponzi schemes of all time. No wonder the S&P 500 experienced its first “loss decade” since its inception, when $100 invested on January 1, 2000 shrank to approximately $90 ten years later – an annualized total return of -0.95%. And that includes dividends.
The S&P 500’s Annual Returns:
While 2009 and the nine years that preceded it were difficult to stomach, they did provide investors with a golden opportunity to learn an invaluable lesson about their own tolerance for risk – something that is difficult for them to know in advance, and is difficult for advisors to truly simulate during the investment education process. From our viewpoint, the experience also highlighted the merits of two fundamental principles of investing: the importance of having a durable financial plan and the benefits of broad diversification.
We would assert that it is virtually impossible for someone to truly assess, measure, or predict, with any real accuracy, their emotional response to an adverse future financial event, especially their reaction to a precipitous and severe market downturn that inflicts a significant loss of resources. Many of us have lived through prior downturns (1973-74: -42.6%; 1987: -29.5%; 2000-02:- 44.7%). But did we learn immutable lessons about ourselves through those experiences? For advisors, ascertaining and measuring risk tolerance has always been more “art” than “science” and has always been heavily influenced by the accuracy of clients’ input. Still, today, with the bruising experience of the past two years fresh in our minds, we believe clients and advisors are in a better position to properly incorporate tolerance for volatility into long-range financial plans. We are also in a better position to identify the type of education that might be useful in order to confirm or create a durable financial plan, something that Aspiriant has been busy addressing in client meetings and through special events like the panel discussions we hosted in October.
During this past decade we also observed that investors who diversified their assets and embraced a disciplined, long-term posture experienced a much better result. To illustrate the benefits of diversification, we have put together a simple chart that shows the results of three different portfolios over the period:
- The S&P 500;
- A Blended Global Equity Portfolio; and
- A 60-40, Equity-Fixed Income Portfolio.
As the chart shows, if you had invested $100 in a Blended Global Equity portfolio (45% Russell 3000, 45% EAFE, and 10% MSCI Emerging Markets) on January 1, 2000 instead of investing in the S&P 500, you would have had approximately $118 at December 31, 2009 – an additional $28, a 31% improvement over the S&P 500 investment. Taking it a step farther, had you diversified the portfolio further by investing 40% of your assets into fixed income and 60% into the Blended Global Equity allocation (as outlined above), you would have accumulated approximately $163 at December 31, 2009, an additional $73—81% more than the S&P 500. Our investment research, and the portfolio recommendations it generates, reflect diversified participation in the global economy and the relationships between asset classes, particularly during times of stress.
Of course, as dismal as the returns are in the above chart, those returns assume that the investors were patient – or at least disciplined - during this volatile period and that they remained invested the entire period. As we know, this is not always the case. Consider, for example, that the decade’s best-performing U.S. diversified stock mutual fund, the CGM Focus Fund, rose more than 18% annually in the ten years ending 12/31/09, yet the average investor in the fund lost 11% annually, according to Morningstar. Sadly, this stark difference between fund performance and actual investor experience is common and is explained by the emotional behavior of investors who try to “time the market” and invariably get it wrong. Instead of investing in the fund as a long-term proposition, the majority of investors ended up buying when the market was high (they were chasing past performance) and selling when the market was low (when things got uncomfortable). This investor behavior is typical during periods of market volatility and highlights the importance of having a well reasoned, durable strategy that allows one to be patient and to persevere through periods of economic uncertainty. Warren Buffet has it right when he says "uncertainty is the friend of the seeker of long-term values."
For the people of Aspiriant, 2009 was challenging but also incredibly rewarding. The events of the past year provided a unique opportunity to help our client families navigate through uncharted territory and set a course toward achieving their goals. For this opportunity to serve and do what we do best, we are very grateful. Rarely, has there been a better opportunity to create value for our clients. In addition to implementing our clients’ plans, we were able to exploit the low interest rate environment and depressed asset values to engineer intergenerational transactions involving an estimated $150 million (which have experienced material gains in the ensuing market rally) while also capturing valuable tax losses in excess of $50 million during the first ten weeks of the year, in addition to the hundreds of millions of dollars of losses captured in 2008. In some respects, it was a great year for making lemonade out of lemons!
On behalf of your entire team at Aspiriant, we thank you for your support and look forward to applying the lessons we learned this year, improving our service offering for you, and serving your needs for generations to come.
And now, on to a brighter and more prosperous 2010 - Happy New Year, everyone!
Chief Executive Officer