Letter to Clients – First Quarter 2010
Dear Clients and Friends,
I hope you enjoyed a wonderful holiday season and wish you all the best as we begin 2010.
Perhaps the most popular question I have had about my new office is about the name on the door. I am asked, "who is V?" by people who assume the D stands for Dinkin. It seems obvious now, but that thought never entered my mind when we named our firm DV Financial. Originally it was going to be DaVinci Financial to remind us of Leonardo daVinci, but later we discovered that there were already a few DaVinci Financials scattered across the country. Since we did not want to create any confusion, we simply shortened daVinci to DV. The name is not really important anyway. What is significant is why Leonardo daVinci serves as an inspiration.
Several years ago I was asked why clients chose to work with me as opposed to another qualified financial planner. While I realize trust, knowledge, and experience are important I am certainly not the only Certified Financial Planner TM who possesses those attributes. Ultimately I discovered that what clients really like is my ability to make them comfortable by explaining their financial situations in a way they understand. Leonardo daVinci said it this way, "simplicity is the ultimate sophistication."
Inspired by that quote I learned more about daVinci and the trait I grew to admire most about him was his wisdom. He did not reject the conventional beliefs of his era, but he refused to limit his thinking by them either. I believe that more than ever a daVinci-like approach to investing is absolutely essential. We have to consider more than just the traditional investment tools such as stocks, bonds, or mutual funds in order to construct an investment portfolio which has the greatest potential of achieving your goals.
2009 was a volatile year which brought to a close a potentially historic decade. As we entered the new millennium we all sensed change in the world. We focused on the impact of Y2K but failed to predict the tragedy of 9-11 and the series of events which followed. Terrorism, war, economic slowdown, and government influence have led us to the economic crisis which loomed over the end of the decade. In order to provide some necessary context for recent market performance and to set expectations for the months ahead, we need to take a moment to look back at what has already happened.
First, let's consider performance, which was strong for the third straight quarter. The S&P 500 Index returned 6.04% for the fourth quarter and a robust 26.46% for the year as a whole. The Dow Jones Industrial Average returned 8.10% for the quarter and 22.68% for the year. This performance is all the more remarkable considering that the market bottomed in March 2009, with the S&P 500 down over 25% from the beginning of the year through March 9th.
As encouraging as 2009's performance was, the following chart provides some sobering context. Despite the strong finish, total return for the S&P 500 Index was down approximately 10% for the decade.
This chart shows the potential growth of $100 invested in the S&P 500 index from 1/1/2000 to 12/31/2009. The S&P 500 (a registered trademark of the McGraw Hill Companies) is an unmanaged basket of 500 stocks that are considered to be widely held and thus believed to be a good indicator of overall market performance. This index of common stocks is weighted by market value. The performance of the S&P 500 does not reflect the application of fees. It is not possible to invest directly in an index.
Numerous commentators have debated the current market's similarities to previous secular bear markets, including the early 1970s and the 1930s. The British newspaper the Financial Times even went so far as to argue that the recently completed decade was the worst in the history of the financial markets. The UK, European and Japanese markets saw similar weakness during the decade.
Do not imagine, however, that the gloom is universal. For the emerging markets, the previous decade has been one of enormous success, particularly for Russia, China and India. According to estimates provided by Ned Davis Research, Inc, Russia has enjoyed a secular bull market dating from October 1998 that has seen an 18.0% average annual return in real terms. India, since April 2003, has enjoyed a 25.1% average annual real return, while our nearest neighbors, Canada and Mexico have enjoyed longstanding secular bulls for most of the decade.
China in particular has seen ten years of unprecedented growth. Hamish McRae estimated in the British newspaper The Independent that China has grown from the world's sixth or seventh largest economy to the second largest, behind only the United States. (China, according to McRae, is now the world's largest automobile manufacturer, having recently nudged ahead of the US.)
So what does all this mean for US investors? What is the way forward? Here are a few major lessons the longer-term view provides.
We are in a secular bear market
With two speculative bubbles (technology and housing) sparking major slumps and flattening the decade's returns, it is clear that the last ten years have been a secular bear market. The question is – are we still in one? Recognizing the transition from one secular environment to another is extremely difficult. According to some analysts, including Ned Davis Research, the current secular bear has not completely unwound. If you share their secular outlook, it may make sense to balance exposure to the current rally with defensive strategies and diligent risk management.
Economic power is realigning
The United States is still the world's leading economic power and we believe its financial markets are still the strongest, most liquid and transparent. However, if current trends continue, it will make little sense to call China, India and several other Asian and Latin American economies "emerging". Rather they may soon be taking their place alongside the developed world on a substantially more level playing field than we saw in the 20th century. At the very least, the secular bull market in many of these economies, coupled with the secular bear in the developed economies, argue strongly for more global exposure.
Government policies and capital market structures will likely evolve
Federal government response to the Great Depression of the 1930s and the capital market regulation that followed dominated our economy for decades. With the economic recovery still in development and policy responses still ongoing, it is impossible to determine the ultimate impact of the financial crisis. It seems likely, however, that your investing future will require careful navigation in potentially uncharted waters for some time to come.
It is clear that we are in a period of extraordinary complexity where professional management, a global perspective and careful risk management are critically important. Prudence requires us to constantly review and examine our decisions of the past to decide if we need to change anything today.
I am here to help when you are looking for opportunities to realign your investments with changes in your goals or your ability to tolerate fluctuations. If you would like to discuss your financial plans in more detail, simply let me know.
Thank you for the continued opportunity to work together.