In BSW Blog, BSW Philosophy, Economic Outlook, Portfolio Commentary


This week featured two notable stock market milestones that offer important insights. First, yesterday March 10, 2015 marked the 15-year anniversary of the Nasdaq’s record high at 5,048.62 on March 10, 2000 (see article from 2000 here). The Nasdaq closed yesterday at 4,859.80, still 3.74% off of its all-time high 15 years prior. Second, Monday, March 9, 2015 marked the six-year anniversary of the bottom of the S&P 500 following the Great Recession of 2008-2009. On March 9, 2009, the S&P 500 closed at 676.53, its lowest point in the prior 12 years (see article from 2009 here). Yesterday, the S&P 500 closed at 2,044.16, having more than tripled in value in the ensuing six years.

These two milestones and anniversaries offer much for reflection and lessons.

1. Valuation Matters (Really): If you had invested in the Nasdaq at the top in 2000, you would still not be in the black fifteen years later. Think back to March 2000 and the prevailing sentiment at the time. Large-cap technology stocks were a “no brainer” and investors couldn’t get enough of them. BSW lost clients who demanded more and more large-cap technology exposure and were convinced that the only market worth investing in was large-cap tech.  Following the bursting of the tech-bubble in 2000, US Large Growth spent the next eight years near the bottom of asset class returns while Foreign Developed and Emerging dominated.  Worms turn and no trend goes on forever.

2. Anchoring Bias: Nobel-laureate psychologist Daniel Kahneman’s research on investor behavior, discussed in his excellent book, Thinking, Fast & Slow, showed that investors have an exaggerated bias against losses during bad times (in the midst of a bear market) as well as a hindsight bias during good times (in the midst of a bull market) that gives them the false sense that the future is predictable. Just as investors anchored to the Nasdaq in 2000, they are anchoring to the S&P 500 today. US Large Cap is today’s can’t lose proposition and investors are clamoring for more and more exposure. Case-in-point, the proportion of individual investor assets in stocks is approaching levels not seen since the market peaks of 1999 and 2007. This despite the fact that there has not been a correction of at least 10% in greater than three years – the third longest stretch without a double-digit pullback in the last 50 years.

3. Performance Chasing: By anchoring performance expectations to the hottest market, all other investments and markets look, by comparison, like dogs. This leads to performance chasing – across investments, allocations, and advisors. Consistent with Kahneman’s research, it’s the stark and predictable reversal of fear versus greed from the dark days of 2009 when all clients wanted to do was exit the market entirely and hide out in cash. When performance expectations are anchored to a single market, like the S&P 500, it’s important to remember that only a portfolio that is 100% invested in the S&P 500 will achieve that return – and only a higher-risk portfolio will exceed it. Investors trying to match or beat that return must be willing to accept greater risk. Meanwhile, those who want some downside protection, some insulation from the inevitable corrections in the market, will have to accept lower returns. Performance chasing is a surefire way to sabotage long-term results.

4. Important Conversations: Index-fund pioneer Vanguard has produced outstanding research on how advisors add value for their clients, which they term “Advisor’s Alpha.” Vanguard’s research showed that the most consistent and sustainable sources of adding value, or alpha, comes from establishing a proper asset allocation to meet long-term goals with minimal risk, tax management via asset location and efficiency, and, most importantly, providing guidance and coaching to adhere to a disciplined, long-term strategy. In the advisory industry, this is referred to as “talking clients off of the ledge” – the analogy for when clients get freaked out by a correction and want to sell out of the market, go to cash, and wait for the “all clear” signal – which never comes. In today’s world, advisors now face the opposite challenge. Clients for whom 2008-2009 (and their attitudes at that time) has drifted from memory, who have anchored to the S&P 500 and its “sure-thing” double-digit gains, and who now feel that they want more growth, more risk, more juice from their portfolios. This is such a hot topic in the advisory community that industry publications are full of stories on the subject, including yesterday’s Wall Street Journal (see article here) and Investment News (snippet here), in which longtime columnist Jeff Benjamin caused a stir with his proclamation that, “A truly diversified investment portfolio should have returned less than 5% in 2014. It was that kind of year. Any adviser who generated returns close to the S&P was taking on way too much risk, and should probably be fired.”

The past five years of double-digit returns have led many investors to forget the pain they felt when the stock market plunged almost 40% in 2008, in the middle of the recession, and to once again miscalculate their risk tolerance. A common refrain in the advisory industry is, “Every client loves risk . . . when markets are going up.” Now is the time to have these important conversations with your advisor.  Not when the market corrects and your urge is to sell and hide out.  Not when it makes a new high and your urge is add more to stocks so that you don’t “miss it.” Now is the time to reaffirm your goals and objectives. Now is the time to ensure that your allocation matches your risk tolerance on BOTH the upside and the downside. Now is the time to reaffirm your long-term strategy. Because the REAL goal is not to “beat the market” or watch the stock ticker all-day everyday, right? It’s to live and enjoy your life without having to do those things – and that’s what “Make Life Better” is really all about.

Thanks for reading,


David Wolf

Managing Principal & Chief Investment Officer

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