Recently, I presented a program for the employees of a Missouri firm. It was their annual profit sharing meeting and each employee received a check for 54% of their 2008 W-2 wages. (Yes, that is not a typo. They received a check for 54% of their 2008 wages as their share of the profits from 2008.) While this is far from the bonuses of Wall Street, it points to the fact that great employers do exist and that some people have options that do not exist for others.
The point of my talk was to encourage them to save for their retirement, while possibly saving a portion of the 54% as a cushion against possible reductions in their hours during the remainder of 2009, as orders have slowed for this manufacturing firm. Importantly, it is the philosophy of the owner to reduce everyone’s hours, rather than to lay-off targeted employees. What did I tell them to encourage them to stay the course, as I did a similar program for them two-years ago when things were a little brighter than they are today?
First, the past ten years have been the worst investment years, since the 1920s. A 100% stock portfolio, if invested in the S&P 500, would have returned a 1.94% annual compound return with a standard deviation of 22.68%, while a portfolio of 60% S&P 500 and 40% bonds would have returned 3.54% with a standard deviation of 12.99%. Given that the standard deviation is an acceptable measure of risk, this is backwards – the higher risk portfolio has the lower return. In fact, one has to go back fifteen years to rectify this relationship and then the 100% stock portfolio had a paltry .01% annual compound advantage for nearly an 8% increase in standard deviation.
The above is good news. Every time we’ve recorded a ten year period, as dismal as the past ten years, it has been followed by ten years of healthy returns. Below is a picture of bear market declines and the subsequent recoveries for each bear market from 1901 through 1991. For each of these recessionary periods, the subsequent gains were, for the most part, larger than the decline that preceded it. While this picture doesn’t show it, I can add that the 2000-2002 period started with 49% decline in the S&P 500, followed by a 34%, 8%, and 7% gain in the subsequent three years.
What do you take home from this? First, remember what you know. There has never been an economic system as strong as ours. I will not bet against it and I encourage you to do likewise. Besides, if the economy continues to go down the proverbial drain, what safe haven exists and where will it be? Do you want to be there without the rest of us?
For financial success, remember your investment principles:
- Invest for the long-term, not the short term. Short-term investing is risky and is tantamount to gambling. Do not gamble with your goals.
- Invest in quality. Save the risky, venture investments for when you are able to withstand the loss of your money.
- Stay diversified across sectors and across firms. Use index mutual funds, if you prefer to match the markets.
- Investing is not easy and it requires discipline. If you missed the best 50 days of returns over the past 30 years, the 12% average of the S&P 500 would fall to 0%. (When you figure out when to predict when each of the next “50 days” are going to occur, please tell the rest of us so we can go “all-in”. For me, however, I continue to believe and invest in our collective future and I’m willing to accept the fact that “Timing is everything, but it is impossible”.)