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October 2009 Update

October 1, 2009

By Tim Chapman

A couple of weeks ago I spoke at a broker-dealer conference in Chicago then traveled to New York for a media day, meeting with journalists from several financial publications.  In both settings I was asked if investor thinking has changed over the past year, and if so, how? The question was asked because it was the one year anniversary of the collapse of Lehman Brothers.  By September of last year, the stock market was already bad and the collapse of such a big-name venerable firm as Lehman made things dramatically worse.  From September 22nd to November 20th - only 39 market trading days - the S&P 500 lost more than 40%. 
 
I've been in this business for almost three decades and I'd never seen the level of fear among average folks that I saw during 2008.  It led me to write a series of "pandelirium" letters to attempt to explain what was going on, and more importantly, encouraging Stadion clients to keep the proper perspective.  Now, a year later, things seem to be getting better.  They always do.  As I said in the communications last year, the stock market has gone down lots of times but it has never stayed down.
 
Federal Reserve Chairman Bernanke is saying the recession probably ended in July. Politicians in Washington have stopped holding daily news conference to explain how only they can save civilization, which is interesting since the near meltdown occurred under their watch and was, in large part, a result of their misguided policies in the first place.
 
I don't know what the future holds and no one else does either.  The current rally could continue during the 4th quarter and on into 2010, or the recent good times could be nearing an end and October could bring another downturn.  The future is always uncertain, that is why 100% of my personal retirement nest egg is managed by Stadion.  I know that no matter which scenario unfolds, our "capture most of the good times, miss most of the bad" will allow me to have a decent return if the market is really good, yet protect me against large losses if (when) the market gets bad again.
 
Back to the question at hand though:  Has investor sentiment really changed over the past year?  I think the answer is "yes".  Investors and financial advisors have been reminded that stocks can, and do, go down.  The five year cyclical bull market from October 2002 to October 2007 had erased the memory of the 2000-02 bear market. In the upcoming Vantage Point newsletter I call this "selective amnesia" (available mid-October).  Hopefully the most important change is that by living through the past 12 months investors have learned that even though stocks go up most of the time, if you don't have an investment strategy to hang on to those gains it doesn't matter.
 
Think about it this way: In the 2002-2007 cyclical bull market, the S&P 500 gained 100%.  We underperformed in our most conservative accounts at Stadion and only captured about 40% of that gain.  By the end of 2008, the S&P 500 had given back all the gains - 0% return over that 6 year period - while we had minimal losses and were still up 35%!   The point being, it doesn't matter if you capture every single dime of the good times if you give it all back in the bad times.  Those buy-and-hold investors lost 6 years of their investing life without growing their retirement nest egg one dollar.
 
Again, let me be very clear, I don't know what the future holds.  But I do know from 28 years of experience how important it is to have a strategy that is flexible enough to be successful in good and bad environments.
 
In next month's newsletter I'm going to take a historical look at secular (long-term) bear markets that hopefully will make the up and down action of the last ten years more understandable.  Until then, let's all root for a good October . . . but be prepared to move to safety if that is not the case!