On March 9, 2009, the S&P 500 reached a low of 673. It was the bottom of the worst bear market since the Great Depression. As we write this newsletter, the S&P 500 is hovering around 1300, an increase of more than 90%, not accounting for dividends. Someone who would have invested in a low-cost broad equity index fund would have averaged over 40% per year for the last 2 years, including dividends.

In February 2009, we felt compelled to send out an email: "Is Asset Allocation Broken?" (the email is still available in the archive on our website). Our message was in response to articles and questions from investors, who saw all the asset classes that they had diversified into, experience double-digit declines in 2008. There were only 2 exceptions: U.S. and Foreign government bonds which dropped less than 5%.

We urged investors not to sell their equities and equity funds, reminding them that stock returns would eventually improve, and that even most people who were already retired, would need some capital appreciation to protect their portfolio from inflation. Our conclusion was that the principles behind the concept of asset allocation were still relevant. We actually recommended that our clients stick with their stated target allocation to equities, and rebalance out of fixed income into stocks and stock funds.

Looking at the same asset classes that we featured 2 years ago, the categories that saw the worst declines in 2008 (equities), returned more than 40% annually since then. U.S. and Foreign government bond funds saw annual returns in the 5% to 15% range. Bond returns were not too shabby, but this illustrates an important fact: investors who panicked in the spring of 2009, sold their stock funds and switched to CDs, money market or government bond funds, would need to see their portfolio increase by another 60% to catch up with investors who kept their equity holdings.

At Bristlecone, we continue to believe that asset allocation remains a very relevant concept and provides a useful compass during emotional times: the appropriate mix between investments that provide capital growth--such as equities, and those that provide income and greater stability of principal--such as bonds or bond funds, should primarily be a function of investors' financial goals, tolerance for risk, and time horizon. Bull and bear markets trigger emotions that can be extremely detrimental to your wealth.