IFA Radio

IFA Radio's Episode 93: Airs 10/09/11

Dealing with the Dive

How do you deal with stocks diving and suffering the worst quarter since going back to the 2008-2009 financial crisis?

Well, first of all I don’t like div-ing because that sounds like stocks are continuing to go down, when in fact, every time we adjust the price for stocks we reset the odds to be 50/50 around an appropriate return for the risk of the investment.

As many of you know, this was a very difficult third quarter for stocks. Here are some of the numbers. The Dow Jones Industrial Average fell 12% for the quarter. The S&P 500 lost 7.2% for the month of September and lost 14% in the three months since June. NASDAQ, the technology firms, shed about 6.5% for the month and 13% for the quarter. Many people are struggling with all this.

I want people to focus on their knowledge not their feelings. In times like this, a lot of people resort to what feels good. And what feels good in investing is rarely profitable for investors. So this is the time when I want investors to tie themselves to the mast. Resist the temptations to run from a scary market, and if anything, I would want you to rebalance your portfolio. That’s one of the key premises of a buy and hold investing strategy. Every once in a while you get back to the mix of investments you determined was appropriate for you when you first started out. Let’s say you took the Risk Capacity Survey, you scored a 40, which means you have a portfolio that’s 50% stocks and 50% bonds, and you take a look at that after this recent quarter and it turns out that now your stocks are not 50% like you started with, now they’re down to 40% stocks. What would you do? I would suggest we sell some of those bonds and buy a little more stocks and get back to that 50/50 mix that’s appropriate for you.

Here’s the other thing. I like to remind investors where they sit historically compared to other times the markets have had these kinds of adjustments. One way we would do that is go to one of our portfolio pages at IFA.com and slide all the way down to Figure 9. In Figure 9, we can look at the historical returns from lots of different time periods. We can look at one month, three months, six months all the way out to 20 year holding periods.  Below is the chart you will find on all our portfolio pages.

In other news…

Recently, an article was written as to whether or not a hedge fund can survive a change in managers? I want you to go to caxton.com. That is the website for Bruce Kovner who this article is mostly about. Supposedly he’s a skilled trader and supposedly he’s had this great return. They claim he’s had this 21% return. By the way, I don’t even believe that. I’d love to see an actual accounting of those returns over all of those years. In fact, he doesn’t say how many years. But even more important, forget all that, go to their website and there is like NOTHING THERE. There’s a paragraph and a link for clients to log in. Where are the disclosures? How do I know what you are going to do with my money? What kind of risks are you going to take? What kind of returns should I expect? How has that worked over long periods of time? I want to see the data! This is the problem with all of this active management nonsense. Most of them cannot provide you statistically significant data of what they’ve been doing in the past. If they can’t do that, why should you believe what you would expect in the future? This is all about expectations; both expected return and expected risks of investments into the future.