Q2 2009 Ends with the Biggest Percentage Gains in Over 5 Years

As a philosophical matter I think highly of the concept of living in the moment or focusing on the journey as opposed to the destination. Anyone believing in this sort of thing thinks it is a healthier way to navigate through life. With that in mind this post may seem like a bit of a contradiction.

First a little context for the second quarter and the first half of 2009. In the first quarter the S&P 500 was down 11.7%, in the second quarter it was up 15.3% and YTD it is up 1.7% plus a couple of dividends. Without getting into numbers which would be a no-no (as our firm understands it) you could expect a portfolio that has generally been defensively positioned all year to have gone down less in the first quarter, up less in the second quarter and be in the same neighborhood at the market YTD. Consistent with the goal of a smoother ride.

One way to describe the job of a portfolio manager it to set an expectation of some sort for clients and then try to meet or exceed the expectation. The expectation set would probably be centered around whatever the investment philosophy of the manager and prospective clients generally need to be of a like mind or it will be a bad fit.

Whether the ride has been smoother over the last six months or not, in my case might matter to our firm’s clients now but the odds of anyone remembering their performance (whether they hire someone or do it themselves) of a given six month period in some random year is pretty low. Quick, how’d you do H2 2005?

What you do know is whether you’ve had a major setback because of this bear market or not. Major setback is probably a subjective term but then what was the expectation set for you or what expectation did you set for yourself?

While living in the moment is very important it is unlikely that a bad quarter or bad year ten or twenty years before you retire will have a truly detrimental effect on your long term financial plan. Of course this assumes proper asset allocation. When the tech bubble burst the ultimate low for the S&P 500 was about 50% below the high. It then made a new high five years later (late 2002-late 2007).

In the current bear the market again cut in half and just like last time very few people expect a new high to come in five years but of course it could. This is not a prediction but just as we learned some things in 2008 about fast declines we should have also learned (more correctly been reminded) of how fast the market can rally even if there is no fundamental justification.

Over long periods of time the market has had an average annual return of 9-10%. If that average is still in tact when you retire then the double bear of this decade will not have mattered a whole lot. In that light anyone who is young needs to focus on the long term and continue to sock it away (maybe a little more intelligently than domestic equity funds) and anyone who is older needs to have a proper asset allocation and not panic sell after a big decline.

You may be inclined to take the above as an argument passive indexing and for you that might be right but that is not what I am saying at all. If we circle back people causing themselves far more harm than a bad market (IE panic selling) then reducing the likelihood of being in a position to panic would have some appeal. It is reasonable to think more people would panic sell if their portfolio dropped 40% in a down 40% world than if it dropped 20% in a down 40% world.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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