Last August I attended my first conference of journalists from around the country in New Orleans. It was a great gathering of outstanding professionals and I always enjoy the colorful drama, food, and drink in The Big Easy. The real treat was getting away to visit with family over a savory lunch at a place I would never have found on my own. But that’s part of what I enjoy about traveling. When you are in good company it’s more than likely the case that the locals will usher you into a family owned restaurant that exceeds your expectations. My grand-niece was at the table demonstrating her best manners of being polite and quiet. After catching up with the parents I asked her what her favorite subject was in school. My ears perked up when she said enthusiastically, “Math!” I asked her are you almost ten years old now? She said yes, so we quickly went through some exercises which became more interesting because as I could see my grand-niece process the questions and answers with aplomb I could also see the parents squirm as it was clear they were hard pressed to quickly come up with correct answers. We finished up with my grand-niece correctly determining what the tip would be. That alone was worth the trip. When we talk now we include math. So, if a ten year old can do math well, you and I can too.
Please see the Draw Down chart below from March 2002 to the end of 2017. Many investors do not recall or do not know how their equity portfolio tracked the S&P 500 decline of -51% by year end 2008. You probably do recognize the great stock market run from 2009 to 2017, but please also see assuming no withdrawals, that it took over four years or 53 months to get back to even.
Source: AssetMark
For comparison purposes you can see a Sample Moderate portfolio. In this case over the same period of time with identical assumptions for no withdrawals, thanks to the active management strategies we have discussed here the decline was -25% and the account took less than two years or 23 months to get back to even. The math is simple. When there is a loss of -50% you need 100% gain to get back to your starting value. When the loss is -20% a gain of 25% is required to see the starting value again.
Earlier this year I referenced Jeffrey Gundlach, CEO at DoubleLine Capital, who said in a video conference that he expects that the market in 2018 will first rise by 15%, before ending the year in red ink. Now I can’t see the future either, but that is a qualified point of view. Again, I am fond of saying, it’s not about the prediction, it is all about the preparation. Gundlach had the courage to declare what he believes may be the upside and it is noteworthy he did not offer an opinion about how low the market may go.
The rocket scientists and aerospace engineers we work with have convinced me the best thing to do is plan for the worst outcome you can imagine. It you are ready for that highly unlikely event you are probably better prepared than most for almost anything. A Professor of Theoretical Physics at the City College and City University of New York, Machio Kaku, Ph.D., said at a conference for financial advisors that he finds evidence that depressions tend to happen every eighty years. We were on track for another depression in 2007-2008 but the can may have been kicked down the road thanks to central banks around the world new found practice of quantitative easing.
Suppose it was 1928 now and you had $1m in the Dow and $1m in New York real estate. By 1932, stocks had declined -90% and New York real estate was off about -60%, according to Yahoo Finance and Dent Research respectively. It is impossible to wrap your mind around what was an extraordinary lifestyle totaling $2m become in about 2 ½ years approximately $500,000 (stocks $108k+real estate $400k). For the buy and hold crowd, both assets took over twenty years to get back to even. Keep in mind, for those born in 1900 the life expectancy was 65 for men and 71 for women, according to the Center for Disease Control. Which suggests to this observer people may have lived with regret before they died, which was also long before they ever saw their high water marks.
So just for a moment, be ridiculous. You saw almost everything dramatically rise in value over the past 9 years. 2017 was an especially outlier year in politics and the weather. If an outlier year to the negative is in the cards let me suggest that now is the time to determine in advance what you can do to keep your assets from being run over by any trains.
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