Yesterday we had a client meeting that I was asked to sit in on to address any portfolio issues that might come up.
The client made a comment that a lot of people think and that I have heard before. He said he would just like to get 10% a year. I met with another client about two weeks ago that said the same thing. One thing I have written several times before is that the way you get 10% every year is by getting 20% one year, losing 3% another, then being up 2% and so on.
Before that meeting two weeks ago I lookup up just how often the market hits that magical 10% number. Since 1971 that market was up 10% three times. Three. Actually two of those three was more like 9%.
To own stocks means you have to capture most of the effect of up a lot, when it happens. The next time the SPX is up 30% in a year and you get 26% or 27% you will be fine. In those types of years just go along for the ride. It is years like 2004, or maybe 2005, where you need to do some heavy lifting. I am not saying 2000, 2001 and 2002 because any type of disciplined exit strategy would of spared a lot of pain from those years.
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3 comments:
I have often tried to make your point. It can be a difficult one to get across. The person, who exited the market in 1957 because of the 10% down draft, missed the 43% gain in 1958. Who had the sense to be in the market in 1975 for the 37% gain after suffering through 1974 with a 26% loss? The S&P was up 30 percent 6 of the last 30 years and yet most of those years came after a really tough year. One cannot avoid risk and make money. A steady 10% return is not available. However, one can easily average 13% or better over the long term. Buffet has averaged 28%.
This lack of understanding is what puzzles me about S.S. private accounts. Not that I think they are a bad idea - it's just that with the level of general understanding out there that thinks you can get a regular 10%/year - these guys are going to be fodder for the Enron-types who are going to transfer their money via fees to their own personal wealth.
Sure there are a lot of vehicles to choose from, but the mentality expressed means that it is the same as offering babies Uzi's or grenades - you get choices there too!
I don't think the client's request was unusual or irrational at all. I think what he was saying was, "I'm already rich and I want to (1)do better than the 10 year T note and (2)avoid any negative number."
That same mentality is why those convert funds have sucked up so much money. The real question is how do you answer him. The people I know with that mentality don't want to even think about taking a -15% year in the stock market. The bubble fallout has made them justifiably skeptical of the "buy good stocks and hold them" routine.
Maybe the obvious answer is "Well, you can have 5% but not 10%."
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