THE MARKETS
Lloyd Blankfein, the chief executive of Goldman Sachs, described
himself as "doing God's work," in a profile last year in London's
Sunday Times. Last Friday, the SEC charged Blankfein's
firm with defrauding investors in connection with securities linked
to subprime mortgages. Investor reaction was swift as Goldman's
stock dropped more than 12% on the day and the Dow Jones Industrial
Average lost 125 points, according to Associated Press.
A volcano in southern Iceland erupted last week and sent a massive
ash plume across Europe, which caused the cancellation of tens of
thousands of flights over a several day period and created
unexpected hardship for millions of travelers, according to CNN.
This floating ash plume is costing the airline industry at least
$200 million a day, according to the International Air Transport
Association.
So, what's the connection between the Goldman Sachs fraud case
and the Icelandic ash plume? Nothing! Yet, in the world of
investing, seemingly random and unpredictable events like these can
materially affect financial markets and specific stocks.
The fact that random and unpredictable events can trigger
financial disturbances is one reason why it is important to keep an
eye on capital preservation and not just focus on capital
appreciation.
|
Data as of 3/12/10
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500
(Domestic Stocks)
|
-0.2%
|
6.9%
|
37.1%
|
-6.7%
|
0.8%
|
-1.6%
|
|
DJ Global ex US
(Foreign Stocks)
|
-0.2
|
3.6
|
47.2
|
-7.3
|
4.9
|
1.9
|
|
10-year Treasury Note
(Yield Only)
|
3.8
|
N/A
|
2.8
|
4.7
|
4.3
|
6.0
|
|
Gold
(per ounce)
|
-0.1
|
4.3
|
30.8
|
18.8
|
22.0
|
15.1
|
|
DJ-UBS Commodity Index
|
0.3
|
-2.9
|
19.3
|
-7.8
|
-2.3
|
3.5
|
|
DJ Equity All REIT TR Index
|
-3.3
|
11.0
|
65.2
|
-10.4
|
3.9
|
11.4
|
| Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS
Commodity Index returns exclude reinvested dividends (gold does not
pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT TR Index does include reinvested
dividends and the three-, five-, and 10-year returns are
annualized; and the 10-year Treasury Note is simply the yield at
the close of the day on each of the historical time
periods.Sources: Yahoo! Finance, Barron's, djindexes.com, London
Bullion Market Association.Past performance is no guarantee of
future results. Indices are unmanaged and cannot be invested into
directly. N/A means not applicable or not available. |
WHICH IS MORE IMPORTANT--making sure you
participate in the market's 10-best performing days or avoiding the
market's 10-worst performing days over any given period? Based on
the 81 years between Jan 3, 1928 and Mar 31, 2009, here are some
numbers to help us answer this question, according to data from
Invesco Aim:
- The 10-best performing days in the S&P 500 index yielded a
daily average return of 11.7%. The 10-worst performing days yielded
a daily average return of -10.8%.
- If you missed the 10-best performing days, $1 would have grown
to just $14.99.
- If you missed the 10-worst performing days, $1 would have
multiplied to $143.47.
- If you missed the 10-best and the 10-worst days, $1 would have
grown to $47.59.
- On a buy and hold basis, one dollar invested at the beginning
of this 81-year period would have grown to $45.18 by March 31,
2009.
- All 10 of the worst performing days occurred during bear
markets as did seven of the 10 best-performing days.
Here are a few thoughts on interpreting this data:
- First, missing the 10-best performing days reduced your growth
over the entire 81-year period by about two-thirds compared to
staying fully invested during that period. This makes a case for
staying fully invested so you don't miss these big up days.
- Second, missing the 10-worst performing days more than tripled
your results compared to staying fully invested. This suggests that
historically, if you had magical powers to foresee the future and
were out of the market on the 10-worst performing days,
your return would have more than tripled the return of the fully
invested buy-and-hold strategy. This makes a case for market
timing.
- Third, missing both the 10-best and 10-worst days in the market
had very little impact on your results compared to just staying
fully invested during the entire period. Score another one for
buy-and-hold.
But, let's be realistic. The above numbers are based on
historical data, you cannot invest directly in an index, and few
people have an 81-year investment horizon. And, by the way, nobody
we know has the ability to perfectly time the market and pinpoint
the 10-best and 10-worst performing days before they
happen.
This data helps support two of our beliefs. First, the
historical data shows the importance of risk management relative to
return maximization. Second, we design your investment plan to meet
your financial goals, not simply to capture or avoid the
best and worst days in the market. Ultimately, it's your
number that we are trying to achieve.
For your convenience the sources
have been listed below:
tinyurl.com/y4ekfjm
www.invescoaim.com/pdf/PPRR10-BRO-1.pdf?contentGuid=c3d4860ebca52210...
investing-school.com/history/52-must-read-quotes-from-legendary-investor-warren-buffett
online.wsj.com/article/SB10001424052702303491304575187920845670844.html
news.yahoo.com/s/ap/20100417/ap_on_bi_ge/us_sec_goldman_sachs_charged
www.cnn.com/2010/TRAVEL/04/17/iceland.flights.volcano/index.html?hpt=T2
news.yahoo.com/s/ap/20100416/ap_on_bi_ge/eu_iceland_volcano_business_impact
