Unexpected World Events
by Rob Wrubel – CFP®, AIF®
The world turned upside down for so many people with the events in Japan of last week and the changing landscape in the Middle East and Northern Africa over the last few months.
Personally, I have a friend in Tokyo who works for Bloomberg. I have been checking his Facebook page daily to look for updates. He posts occasionally and I guess he is running full speed to get his family safe (they have located to the south of Japan) and professionally to report the news.
Last Friday, we witnessed a tragedy as an earthquake rumbled off the coast of Japan and the tsunami that followed overturned people, boats, buildings and anything else in its path. Then, over the next few days we saw on TV and read in the papers about the unfolding dilemma and crisis as reactors at the Fukushima Daiichi Nuclear Power Station caught fire. We wait every day to hear more news and hope that the radioactive fuel will be brought under control and a devastating global event will be averted.
The events in Northern Africa and the Middle East—in Egypt, Libya, Bahrain and Tunisia—have caught the world by surprise. Most in the West are excited by the prospect of emerging democracies driven by a new generation looking for political freedoms, employment opportunities and open social networks. Of course, it comes with worries of Iran-style regimes and the contraction of the oil output needed to run the global economy.
Equity markets have responded to this uncertainty. The Dow Jones Industrial Average had rocketed during the first few weeks of the year, starting at 11,577.51 from the year end close and reaching 12,391.25 to close on February 18. Now, the Dow closed 11,613.30 on March 16 (the S&P 500 had a similar rise and fall). We are back to where the year started.
This year is beginning to feel like early summer last year when the European debt crisis gripped the world markets. There was a sense of panic then as investors were just beginning to feel some recovery from the end of 2008 and early 2009.
We hope that we have learned something from the experience of recent investment history. Responding to each crisis and upswing will drive us to distraction. Portfolios seeking to time the market do not work.
Historically, individual investors flee the markets about the time the market finally hits a bottom and come back in after the peak is near. They sell low and buy high—not the best way to find success in investing over time. Emotions are hard to fight when your money is at risk and the world around seems filled with danger.
Think about the years from 1970 to 2010. The stock market in the US had an average compound annual return of 10.0% according to Morningstar.
That period also saw the oil crisis of the early 1970s, the dot.com and banking fiascos in addition to Chernobyl, the Iran-Iraq war, two US wars in the Middle East and the rise in terrorism in addition to countless other significant events around the globe. During this time, there were significant market corrections, high inflation, several economic expansions and contractions and fears of municipal bankruptcy, high government debt, the takeover of the US economy by several foreign sources and other material events impacting our investments. It was also considered to be one of the best times in history to be in the stock market.
We believe in constructing portfolios that give our clients the chance to meet their long term and short term goals. These portfolios use investment theory that states it is best to blend expected returns of different asset classes over time. We also take in to account client experiences and risk tolerances to develop unique client portfolios.
We have clients with portfolios holding more fixed income securities than equities. We have many clients with more equities than fixed income. We may hold commodity funds or real estate funds. We have accounts that are in short term dividend paying securities as that money might be needed in the next year or two to buy a house, pay for retirement expenses, fund education or start a business.
Why do we not advocate switching from full equity to full fixed income to full commodity portfolios as we seek to maximize turns in the economy and world markets? The clearest answer is uncertainty. As the events of the past few weeks show, predicting the next day, month or year is next to impossible. Oil cost 20%-40% less just a few months ago. Who would believe that a potential outbreak of democracy would be possible in the Middle East and that it would create uncertainty in the oil markets?
Chasing the hot sector or manager is a roller coaster ride that most investors jump off of at the first chance. Investors act with their hearts as much as their minds—pulling money out for reasons that have little to do with the facts at hand. Investors also do the opposite and pour money into areas that sound great on paper but have little chance of making money—remember the tech companies with little revenues, huge losses and gigantic valuations?
Portfolios with some balance tend to work best over time, in our opinion. We seek to maintain limits on portfolios as to how high or low any one sector, style or asset class can be relative to the whole. This forces us to rebalance portfolios when certain asset classes have done extremely well and buy those that have lagged behind. It is not always easy to do as buying beat up assets does not always look or feel smart. It usually pays off over time.
Today, the world again feels uncertain and there is no guarantee that what has worked for the past 100 years will continue to do so. We think it will.
Our hearts go out to people whose lives have been devastated in Japan. We look with hope to emerging democracies around the world. And we enjoy our conversations with you and the trust you have in us to help review, manage and build financial success.
Rob Wrubel is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.