Insightful Investing Newsletter January 2009
4th Quarter 2008 Market Recap
If you thought it could not get any worse for the financial markets than the 3rd quarter, you were in for a painful 4th quarter. The stock market subtracted an additional -22% from shareholders, to end the year with a -37% fall. It was the worst quarter since the 4th quarter of 1987, and the worst 12 month period since the 3rd quarter of 1974. Just be thankful that we did not end our year in November, which marked the worst 12 month period since 1932. What a way to highlight the one year anniversary of the start of the recession that economists now say we have been in.
We will take it easy on you statistically this quarter and just say that all equity categories fell between -20% and -30% for the quarter, and -30% to -50% for the year. There is no need to dwell on it any more.
Bonds continued to be the only safe place to hide, and that was really only for government bonds. Who would have thought that the 5% you would have earned by being in a diversified bond portfolio would have given you top honors over the last year. That is of course if you avoided the high-yield variety, which again showed their high correlation to equities by posting a -26% loss in 2008.
Recession fears continued to hurt commodity markets even more than the stock market, especially in energy markets. While an allocation to long only futures would not have helped with diversifying your portfolio this year, adding a managed futures fund would have.
Once again, the financial markets gave us an example of why it pays to have a well diversified portfolio and to rebalance your portfolio when one or more asset classes becomes too large a piece of your pie.
OK, so now for the good news. One important thing to remember about the terrible years for the stock market in 1932 and 1974 is that they were each followed by very strong performing markets. While that sounds all well and good, we only have to go back to 2001 - 2002 to throw up the red flag of caution. Sometimes, it takes a while for the market to recover. That is why even though the probability of profiting from investing in the stock market in 2009 is in your favor, it is not time to go all in. If you took a lot of your money off the table in the last year, you should start to slowly get back into the market. On the other hand, if you rode out the storm by being fully invested it is time to get your portfolio ready for the coming recovery, even it if may be 2010 before that gets started.
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