In February 2009, we distributed a piece called "Is Asset Allocation Broken?" It was in response to questions from investors following articles in the media claiming that the drop in share prices was evidence that market timing or "tactical" allocation was superior, a disguised call to abandon stocks during bear markets. We argued the opposite: "No matter how gut wrenching it is at times, most investors today need to take some risks by investing in equities in order to reach their financial goals. It is therefore critical to build a portfolio that is appropriately diversified and (just as important) regularly rebalanced." In other words, we argued for adding to equities during the bear market so as to maintain the overall portfolio mix between stocks and bonds constant.

 

A couple of weeks later, the US stock market hit a low and has since then returned more than 60%, one of the biggest increases ever recorded over such a short period. Yet, millions of investors across the country did not participate because they panicked sometime between late 2008 and early 2009. They dramatically reduced or eliminated their allocation to stocks, and reinvested the proceeds in bonds or cash. Make no mistake about it: a significant portion of these investors may never fully recoup their losses. Some permanently jeopardized their ability to retire comfortably.

 

Candidly, despite our best efforts, not all our clients stayed the course.  A small number did actually liquidate their equity holdings during the last quarter of 2008 and the first quarter of 2009. We feel terrible that we were not able to talk them out of it. On the other hand, we are very happy that the overwhelming majority of our clients did stay the course and rebalanced their portfolio through that period (some brave souls even moved excess cash into equities during the bear market).

 

We do not know what the future holds, but let's draw the appropriate lessons from history. Short of a complete breakdown in civil society, bull markets follow bear markets (and vice-versa). As the articles below illustrate, timing these cycles is a loser's game. Our philosophy in helping you meet your goals remains the same: "build a portfolio that is appropriately diversified and (just as important) regularly rebalanced."

 

Thank you for staying the course this past year with your investment plan!