What I've Learned from 1983-2011…A Perspective :Brian Carden "Insights"

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03/08/2011

What I've Learned from 1983-2011…A Perspective

MARCH 2011

It’s scary to think I’ve been in this industry for 29 years…a good percentage of it was as a wholesaler for major insurance and investment firms, but still…I’ve been in and around it for almost all of my adult life. This after having said I would never be in this business while still in college. However, I thought it would be interesting to share what I’ve seen since I got my first securities license back in 1987. (Two months before the first “big crash” by the way.)

Back then, there were only “insurance agents” or “stock brokers” as financial planning as we know it today was in its infancy. The raging bull market from 1981-2000 was just starting to run and IRA’s, 401(k) plans, and mutual funds were just coming into popularity. My first company retirement plan was a profit sharing plan with an after-tax contribution option and if the law hadn’t changed in 1986, I would have had to stay there for 15 years to be 100% vested. My first mutual fund purchase had an 8.5% front end load. Luckily for all of us, that’s all changed.

When I first became a retail advisor in the early 1990’s, I had to pick the mutual funds for my clients. Diversification meant breaking the percentages into large and small cap stock funds, maybe a bond fund to reduce the risk of stocks, and the most I could put into International funds was 25%. Back then, the market was “sailing along”. You threw money in the market and it went up! My recommendations were based which fund family had the best past 3,5, and 10 year performance…or by what funds your company told you were available for you to sell. There really wasn’t a risk tolerance profile back then…people saw the double digit returns of the stock market, and wanted you to get it for them…and it was fairly easy during those Glory Days of the roaring 90’s.

Around 1990, a professor named Harry Markowitz won a Nobel Prize in Economics for his studies on “Modern Portfolio Theory” and how a broadly diversified portfolio could significantly reduce the risk of stocks while continuing to give reasonable returns. He said it wasn’t market timing or investment picking that made the difference, but that diversification and asset allocation were the keys to managing volatility (aka risk). I knew these types of portfolios were available, but in their initial stages, those offered catered to the higher net worth investors and the account minimums were in the $1,000,000 range. It takes the industry a while to adapt to new ways of thinking, but in the mid 90’s, when the mutual fund industry began to create model portfolios that fit the average American, I became a true disciple of his theories. It took the guesswork out of which funds to pick, and also allowed me to be an advisor and not a picker. My belief was and still is that my role is not to manage your money, but to manage you and your financial process. If you worked with me, there’s a high percentage chance you were invested in an actively managed portfolio model…and I was criticized by some for utilizing these strategies because they weren’t aggressive enough!

In March of 2000, the dot-com bubble burst. The market was driven to ridiculous highs based on investor greed. (Easy dot com…easy dot go!) Alan Greenspan, the head of the FED, (the guy that has his thumb on the pulse of the economy) said on more than one occasion, “The market is showing signs of “irrational exuberance””. This meant even he didn’t understand why it was doing what it was doing as it was defying common sense. Companies that in the final analysis had no chance of making a profit saw their stock go through the roof in a matter of weeks…only to be worthless later. So the raging bull market officially came to an end. All of those people that were taking way too much risk than they should all got absolutely hammered when the market corrected. For many, it was like a big “hail Mary” to make up for those years when they didn’t save anything and they saw the market as a way to get rich quick & retire well…at least that’s what they thought. So they headed for money markets and other accounts that they thought were “safe” only to find their accounts being eaten alive by purchasing power risk (aka inflation).

At that time, that was the first real major correction of the last 20 years, so everyone kept saying “Don’t panic, the market will come back…it always has!” However, you don’t really know you’re in or out of a bull market until Wall Street and the FED says you are. So, even though we’ve been in this current bear market for going on eleven years straight…with no signs of a real change, the media keeps relentlessly telling us that we are heading for happy days. So we keep plodding along, being told to “keep sailing, it will come back”. Financial entertainers even to this day, still use ridiculous hypothetical rates of return of 12-15% in calculating what future account balances will be worth down the road. CNBC seems to report two things on a regular basis: The Dow is soaring or the Dow is plummeting.

So we go back and forth during the last decade…or the “Lost Decade” as it’s come to be known as the average return in the S & P 500, the Dow Jones Industrial Average, and the Russell 3000 for that decade was exactly ZERO PERCENT. If we look back to 2008, as Yogi Berra says “It was déjà vu all over again!” If we thought 1999 wasn’t bad enough, we had no clue 2008 was going to happen. Just like the big Nashville flood of 2010, it was devastating…no one saw it coming…no one prepared for it…no one in their right mind could have predicted it would have happened…but it did! The US and global markets were down 30-40%. Despite my best efforts in keeping my clients’ investment portfolios properly diversified and managed specifically towards their tolerance for risk, everyone’s balances declined. Managed accounts, mutual fund portfolios, and variable annuities…all of them went down. Emotions superseded logic in the worst way possible.

Diversification was meant to have asset classes acting differently during market swings. Stocks go up, bonds go down, US goes down, International goes up, so on and so forth. That’s the way it was supposed to work! That’s what won the guy the Nobel Price for crying out loud!! However, when we needed it to work the most, it broke down. When asset classes should have reacted in an opposite fashion, almost all asset classes became more correlated. By the way, correlation is when two or more items act in the same manner. Note to self: What has worked for Mom & Dad for the last 59 years in building a wonderful marriage, won’t work in an investment portfolio.

Bringing this to the present…you’ve probably looked at your investment statements for the last year. Congratulations, you were probably up. The S & P 500 returned almost 15%...most of it in the 4^th quarter. “Happy days are here again, right?” Here’s the part that is confusing…I’ve yet to read or hear anything from my various money managers as to why the market was up other than consumer spending was up and consumer confidence was stronger. Does that make sense to you? Is the market showing signs of “Irrational Exuberance” again? Wall Street can’t tell us. A manager that had a banner year last year is now pessimistic. One that was ultra conservative last year, all of a sudden is optimistic. We are still in a Bear Market, and will be there for several more years…that is the only thing Wall Street can agree on.

So, what have I learned? Here’s a list of only a few things. I’ve learned that:

The market is about as unpredictable as it’s been in my entire career…and it will continue to be for the rest of my career.

Those too many in our business claiming to be advisors are simply investment salespeople offering a false hope based on past performance and hypothetical future rates of return.

That a local advisor cannot effectively manage your money, multi-billion dollar globally based entities with teams of researchers & highly educated non-emotional specialists do…and even then, they get it wrong.

That a single strategy of “buy and hold” won’t work anymore. It takes so much more than that.

That “alternative investments” that were once shunned upon, such as currencies, commodities, and managed futures, need to be discussed as a part of your portfolio NOW.

That a group of economists can’t agree on anything…and rarely will never get it right.

That financial products are only a small part of the equation…if the financial strategies are not there, failure becomes an option.

That the more I think I’ve learned it all, the more I realize haven’t learned as much as I need to.

That common sense just isn’t that common anymore.

There’s no telling how long this list could get...good thing I’m only talking about my profession. Hopefully, I’ve been honest enough to let you see just some of what I’ve seen for all of these years. I’ll close with my seven word mantra, which is “I can help you if you will let me”. As always, thanks for reading…do me a favor…add someone to my monthly subscription list…maybe they need to talk to me.

Many thanks!

Brian
Brian_Carden@Peachtreeplanning.com

Posted by Brian Carden at 08:45:00 AM in Financial

Technorati Tags: Brian Carden, financial planning, money management, Peachtree Planning, personal finance

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03/08/2011