2009: The Year in Review
By: Jon P. Yankee, MBA, CFP®, AIF®
Who Would Have Thunk It?! At the end of the first quarter of last year, with U.S. large cap equities, as measured by the S&P 500 index, down 11.7% following the horrendous collapse of 2008 – who would have thought that the markets (U.S., International, Commercial Real Estate, and Commodities) would have ended 2009 with a rally of historic proportions? We didn’t predict it...but as you know, we are not in the business of predicting or speculating. Investors with a long-term strategy and an eye on the history of market cycles could have predicted that such a rally would happen – just not the timing of the rally.
For the year, the S&P 500 finished up a surprising 26.5%; international large cap stocks were up almost 28%; international small companies were up more than 41%; emerging markets were up more than 75%; commercial real estate (REITs) were up more than 27%, both in the U.S. and abroad; and commodities were up more than 13%. For many of us, 2009 felt like we were getting some of our money back, but we did not get all of it. By the vicious math of down and up markets, an investor who took the full brunt of the 40% declines in 2008 would have required more than 60% returns in the next year to break even.
Unfortunately, most investors did not participate in this historic upturn in the markets. According to the Investment Company Institute, by the end of the first quarter of 2009, total stock exposure of global investors had dropped in half, with many of those dollars flowing out of stocks and into U.S. Treasuries, just in time to catch a rare losing year in government bonds. In addition, by the end of March 2009, more than $500 billion (with a “B”!) was sitting on the sidelines in money market funds...just in time to watch and miss the historic rally for equities.
It Is Not Different This Time! In studying the history of market returns, behavioral finance, and investor behavior, these are not surprising statistics. Most investors are guided by emotions and what those around them are talking about or doing. Too often, investors make decisions based on emotion or a misguided view that they (and/or their friends, colleagues, or a CNBC market commentator) know something that the markets do not know. With our clients, we talk about “frame of reference risk.” Most investors’ frame of reference is influenced by the people surrounding them, the media, and other external factors – all of which can lead to a very narrow view of the workings of the global markets for equities and fixed income.
The most difficult part of investing is sticking to a strategy that involves looking at what the past has taught us (and where the markets have moved our portfolio allocations), rather than looking ahead and trying to predict the future (and change our investment strategy based on this prediction). Of course, these predictions are merely guesses, as is anything you hear about investment returns during the next year. There are positive and negative surprises in our future, events that will help or hurt. But generally, over time, the positive influences always tend to outweigh the negative ones, which is why we no longer live in caves or ride mules to work. While we do not know what the future will bring, it is a good guess that the trauma of 2008, and the first decade of the millennium, will be remembered as unusual detours in the longer-term upward march of the markets.