January 8, 2010Happy New Year! Next week, the Investment Committee here at Emerald will look forward with some thoughts about markets, asset allocation and how to make 2010 and beyond a rewarding investment experience. As a reminder, past GreenThought$ are posted on our website, www.EmeraldAssetAdvisors.com. You can always contact us with questions, feedback or thought$ of your own. Today, let's take a brief look back at some of the things we covered in 2009 that are still worth keeping in the front of your mind as the calendar turns. GreenThought$ issue dates are noted in case you wish to look up the full stories on the website. My current comments are in bold. January 9, 2009 "Risk management is our underlying theme for 2009...and beyond." "We believe that in rushing to Treasuries and away from all things growth-oriented, that process is underway. Translation: we are as 3-year bullish on growth assets as we've been at any time since 2003." "We'd advise investors to stop obsessing about "calling the bottom." In 2008, if you had a strategy that allowed you to "...escape with losses that were (noticeably less than) the broad market...does it put you in a much better position, having 85% of that portion of your portfolio intact at year-end when many around you have only 60% of theirs to grow from here? ABSOLUTELY." That's why I say, don't look at how you did in 2009, look at how you did over 2008-2009. For instance, the S&P 500 Total Return Index gained about 26% in 2009, after losing about 37% in 2008. Do the math: In 2008 an index investor turned $100 into $63. In 2009, that $63 grew back...but only to about $79. Net-net, you are 20% worse off two years later. It follows that, for a growth-oriented investor, if you are today anywhere near where you ended 2007 following this tumultuous two-year period, you came through in very good shape. It also may cause some to realize that investing for "capital preservation" and "income" as a primary objective may not be necessary. If you can use strategies that offer long-term upside potential beyond bonds and CDs, and you can feel confident that even in a worst-in-a-lifetime market scenario you are flat after two years, that's a pretty good feeling. March 9, 2009 "We think there is a growing possibility that a period of investor apathy will arrive." Based on trading volume and general acknowledgment that individual investors were largely absent from the stock market in 2009, this appears to have happened. Ironically, this article was published on the exact day the S&P 500 hit its low closing value for the year. March 19, 2009 "The market rallied just at the point at which pessimism had reached overwhelmingly negative levels, and this is something that has happened over and over again throughout history. Call it the "it's always darkest before dawn" theory of investing, and it has been quite reliable over time, in our assessment." "So the point of this issue of GreenThought$ is deceptively simple: Be very careful about drawing all-or-nothing expectations about the future direction of the financial markets, and also understand that the markets are not simply a reflection of today's economic headlines."
April 24, 2009 To those of us on the Emerald investment team, the next many years will be about two things: 1. "Renting" the stock market instead of owning it - i.e., not committing to have some set percentage of money in the stock market all of the time, as static investment plans often do; 2. Applying a level of portfolio "risk-management" that is not only uncommon to most investors, but quite foreign to those in the money management industry. Despite the 65% run-up from that March 9 low through the end of 2009, we have not budged in these beliefs. More on that in the 2010 outlook. May 13, 2009 "We believe Tactical Asset Allocation is best used as a tool within a larger portfolio, not as a long-term strategic commitment. That is how we view our use of TAA at Emerald." June 2, 2009 "SUMMER FORECAST: clouds mixed with sun, chance of scattered thunderstorms, highs around 1100?" At the beginning of the year, I was asked for a prediction of the stock market in 2009. I tend to shy away from projecting exact numbers and time, so with the S&P 500 Index at 903 at the end of 2008, I said I thought we'd see 800 and 1100 during 2009, but I had no idea when and in what order. As it turned out, the market quickly fell after an opening week pop, and fell below 800 on February 17. While few would have believed it possible at the time (we did), the market ran up and crossed 1100 exactly nine months later, on November 17, before closing the year at 1115. July 22, 2009 "So-called "juiced" ETFs (a reference to the boost athletes get from steroid use)...appear to us to be today's "gotta have it product." We like ETFs, but like many financial creations that came before them, we think they are overused, not sufficiently understood by many who use them, and risk being the poster child for the next embarrassing chapter of the investment advisory business. How can an investment advisor attempt to avoid being caught in the net this time? In our opinion, it is as simple as this: stick to using ETFs that DO have liquidity and DON'T use leverage to muscle up their returns. We often use ETFs (not the leveraged type) for tactical investing within our portfolios." This has become a hot-button issue for our industry and its regulators. We are glad to have brought it to your attention prior to the national uproar that soon followed. August 21, 2009 "Don't be jealous of lagging the rally, and have a plan in place for if/when panic replaces relief and euphoria." October 16, 2009 "It was reported recently that in the first eight months of this year, approximately 90% of the money that went into mutual funds went into bond funds. The remainder went to equity funds, but even that small segment went to the more conservative types of stock funds. From what we read, even bond managers are perplexed by this. It also hints at the retail investor being dramatically underinvested during the historically-strong stock market run since March. That would not be a problem, except that historically, that's exactly the cycle that leads to a renewed round of trouble for the markets. The "little guy" gets in late, enjoys the party for a while, thinks he has figured it out this time...and then the cops come and break up the party."
"So, you might ask at this point, are we bearish? A better question is what do we do now? Our answer is to continue to ride the coattails of this 1999/2000-style momentum, but do so with a balance that weights toward risk-management over return-maximization."
November 27, 2009
"Yes, performance actually matters in the fund business - it's not all about costs, it's about long-term return NET of all costs. That is what investors have to spend on their lifestyle, yet it seems to me that over the past decade, many investors (and even some financial advisors) have had a difficult time re-educating themselves about the "performance vs. cost" relationship. Simply put, if you invest in a fund that, by design, is highly correlated to the movement of the stock market, guess what: in a down market, you can lose a lot of money! Does it make you feel better that you didn't pay much for the experience?" In our next issue, we'll look ahead, not simply to 2010, but beyond as well. Have a great start to the New Year!
The information herein has been obtained from sources believed to be reliable, but Emerald Asset Advisors, LLC ("Emerald") does not warrant its completeness or accuracy. Prices, opinions and estimates reflect Emerald's judgment on the date hereof and are subject to change at any time without notice. Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Further information on the firm and its advisory fees may be obtained from the firm's Form ADV Part II, which is available without charge upon request. Complete descriptions of all Emerald's products and benchmarks are available upon request.
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