While it may be an oversimplification and/or the understatement of the year, it is safe to say that the investing world has undergone a massive change over the past decade or so. In short, the landscape as well as the business model and culture of Wall Street have changed completely. The investment strategies once thought to be bullet proof are now riddled with holes. And cutting directly to the chase, the question of the day that every investor, portfolio manager, trader, etc. needs to ask is: Am I keeping up with the change or simply hoping things will return to “normal?”
Although I don’t want to spend my few minutes this weekend beating a dead horse or sending readers into a state of depression, the point to this week’s big-picture missive is this: It is vital that investors and financial services professionals alike understand that they have got to make a change to both their thinking and their approach to the markets if they expect to succeed in the "new normal."
It’s Time to Think Differently
Think back for a moment and ask yourself the following questions. Have those asset allocation strategies that were all the rage performed well over the past decade? How have those buy and hold mutual funds done? Has Modern Portfolio Theory really done its job? Did diversification by style or even asset class do you any good during the Credit Crisis? And finally, should we expect things to return to “normal” any time soon?
Let’s focus on the concept of “normal” for just a moment. One of the biggest problems for investors these days is the “normal” they grew up with turned out to be one of the greatest secular bull markets in history. Remember, the mutual fund industry was really born in the early 1980’s. So, the concept of buy-and-hold that has been espoused ever since is really a strategy based on a raging bull market environment. And in all honesty, from 1982 through 2000, the game was easy – buy and then buy some more!
However, anyone that’s been in the business a while (I guess we’re called gray-beards now) knows that the 1982 – 2000 period wasn’t actually the norm and that investors growing up in the market during the previous cycle (1965 – 1982) had a completely different view of the game.
While I’ve used this stat a fair amount over the last couple of years, I’m going to repeat it again this week for emphasis. From 1/1/2000 through 6/30/2009, the average growth mutual fund (as defined by the Lipper Large Cap Growth Fund Index published in the Wall Street Journal) sports a total return of… wait for it… -47.20%. Yep, that’s right, if you had decided to start the new century off right and plunked $10,000 into that growth fund index, you would now be looking at an account value of $5,280.
Unfortunately, a more conservative asset allocation strategy hasn’t been the savior it was billed to be either. For example, according to our internal numbers, that same $10,000 invested in an allocation of equal parts Lipper Large Cap Growth, Lipper Global, and Lipper Government Bond since 2000 sports a cumulative return of -6.53%. Sure, that’s significantly better than the devastating loss seen in growth funds, but hey, do you think anyone really expected to lose money on a “more conservative” asset allocation strategy over a 9.5 year period?
The New “Normal”
The point is the “normal” we’re dealing with now is no longer a secular bull market. In fact, it appears to be just the opposite; a secular bear market – and is one that could linger for quite some time. So, should we really expect the same strategies that worked so well during a raging bull to work during a secular bear?
We do believe we saw the low point of this cycle and perhaps even a generational low on March 9th. And the 40% rally off the bottom has certainly been enjoyable. We’ll even suggest that this “mini bull” may have a fair amount of upside left. But, the new “normal” is also an economy that is facing some rather severe and persistent headwinds. Thus, the big-picture upside for U.S. stocks will likely be limited for some time.
By now, most everyone who has a 401(k) plan can cite the issues facing the economy. The massive debt burden, the housing dilemma, the jobs picture, and a consumer who’s attitude and behavior will likely
