August 24, 2009 – I met with clients this weekend, a relatively young couple who have been steadily saving for retirement. They did not exhibit the sense of bewilderment and fear shown by a few clients earlier in the year (although from darned few, I’m proud to report). Rather, their vision is clear: continue to build wealth by saving regularly and confine spending to necessities. Live a comfortable retirement, with the hope of leaving a legacy to their children and grandchildren. I was surprised when the wife did not advocate a strategy of retreat. There were no questions like “wouldn’t it be smart to just buy CD’s?” Often wives are the more conservative half of a couple. But this wife reminded me
that they have nearly 20 years time to ride through economic storms before retiring. This was her way of telling me they can afford to take some risk and are thinking long term, which has proven equities to be a viable way to build wealth. It is refreshing to know that the economic uncertainty of the past couple of years have left some people relatively unruffled and eager to benefit from the many opportunities afforded by the capitalist system. Perhaps a contributing factor to their continued faith in the future was the relatively benign experience they had during the near collapse of financial markets. Their accounts, while down from two years ago, are about even with August 2008, just prior to the meltdown that accompanied the Lehman Brothers collapse in September.
When the clients asked how large their assets might grow over the next 20 years, I swallowed hard. This is difficult to know, and I’ve learned to be skeptical of long range projections, including my own. You see, even with superior investment performance, the kind I’ve been able to deliver, there are “macro” factors over which investors simply have no control. I felt strongly that the markets were overvalued in the months and weeks leading up to the “Tech Wreck” at the turn of this century. I exited nearly all tech stocks well before they dumped. But I did not know that a handful of killers would hijack jetliners and crash them into buildings, which deflated the value of even non-technology stocks and set the price of US T-bonds soaring. In 2006 I knew the residential real estate market was overheated, but did not realize that foolish and greedy bankers were leveraging mortgage bonds 30-to-1, leading to the collapse or near collapse of important banks, which in turn led to massive inflation of the US money supply. One cannot know the future. This does not mean we are defenseless in the face of “luck” factors beyond our control. I believe the past two years have decisively demonstrated the value of diversification and attentive portfolio management. The damage suffered by our clients, even at the lows of March 2009, was not irreversible. Most are back to where they were a year ago. Every crisis presents opportunities and we seized many opportunities in the past 12 months. The future remains subject to a great degree to the vagaries of luck, but the process by which we deal with these uncertainties has been tested and appears to have proven itself in the heat of battle.
