Weekly Market Commentary 6-18-12

panic button

Panic
Weekly Market Commentary 6-18-12
Tim Phillips, CEO – Phillips and Company

As a professional investor and advisor, I have had the dubious privilege to write - on a few occasions now - some basic lessons about investing during critical times. Over my 25+ years of experience (and mistakes), the last five take the prize for being the most critical.

When investors look at the current “wall of worries” we have to climb, it takes every ounce of will power not to hit the panic button:

Okay, I think we get the point. Given these critical times, these are the lessons I’ve learned, and reflect upon to help guide our clients and my own investments.

Lesson 1:

In the long run, much of the current noise will be discounted and there will be a reversion to the mean.

Lesson 2:

The old saying, "Don't just stand there, do something" does not always apply. Sometimes the best thing is, "Don't do something, just stand there.”

This is especially hard for active decision makers and investors. During the trough of our markets in 2009 I had the privilege of working with some great investment committees. One such committee took the advice to “just stand there” and resisted their gut instinct to, “do something.” They were richly rewarded.

s&p 500 index through recession

I also witnessed a CIO from a major institution feel the need to, “do something”. He moved 5% of the portfolio into cash near the bottom of the trough, and then reinvested the money only nine months later. He lost 273 basis points in performance to the S&P 500 and likely will not make up the difference for years to come.

Lesson 3:

Sleep well money today does not mean live well money tomorrow.

You need risk to generate returns. It's that simple. The questions you constantly have to ask yourself are also simple:

  • When exactly is, “tomorrow”, when will I need to draw on my account? For example, 1 year from now or 10 years from now?
  • What are the associated expected rates of return during that time frame I can expect?
  • How much sleep am I willing to lose riding through the risk I need to get to tomorrow?
  • How much volatility can I tolerate?

expected return distributions over 1 year and 10 year horizons

One of the reasons endowments and foundations do much better than the average investor is because they have an unlimited time horizon. This infinite time horizon allows them to look past the type of events we are facing now. It's fairly simple math, however it’s not simple to do through a rational and objective lens. If your advisor can't help you think through this, it might be time for a new advisor.

Lesson 4:
Don't panic.

In general, when your emotions take over, your investment returns suffer. I can almost predict the exact bottom of markets based on when I start getting panic phone calls from clients. "Sell everything, I give up" is a common directive. I still have a fax from a client that gave such a directive in 2002. The fax was on Friday, October 4th 2002. The market bottomed Wednesday October 9th 2002, a mere five days later. This decision cost the investor 101% in gains he could have had as the market rallied over the next five years.

In the end, these lessons won’t necessarily make you rich overnight through investing, but hopefully they will help you stress less about your investments in the short term. If you have questions or comments please let us know as we always appreciate your feedback. You can get in touch with us via Twitter, Facebook, or you can Email me directly.

Tim Phillips, CEO – Phillips & Company
Research supported by:
Adam Gulledge, Associate – Phillips & Company

Chart 1: JP Morgan Asset Management
Chart 2: Vanguard Research