Tuesday, September 11, 2012

Ghosts of Septembers Past

Here we are in September again, which is one of my favorite times of the year - the kids go back to school, lots of great food at the farmers markets, and, of course, football.  Unfortunately, September has also been the month of the two most significant and difficult events in my professional career: the terrorist attacks of September 11, 2001 and the Lehman Brothers bankruptcy of September 15, 2008.  We spent a lot time after both of those days communicating with clients who were understandably shaken and worried about the future.  Our advice both times was that the best strategy was to stick with the plan, ride out the storm, stay the course, etc..

So how have things worked out?  Let's look at investment returns from the beginning of September 2001, which is before most of us had ever even heard of al-Qaeda.  We'll use two indices to measure stock market performance: the Dimensional US Adjusted Market 2 Index for domestic stocks, and the Dimensional International Adjusted Market Index for international stocks.  We prefer these indices to better known ones such as the S&P 500, because they are far more diversified and have significant weights in Value and Small Cap stocks, which is closer to the way we actually invest on behalf of our clients.  The table below shows the results:

You can see that a portfolio containing 60% domestic stocks and 40% international stocks returned 7% per year, or almost 5% over inflation.  It is also interesting to see that international stocks outperformed domestic stocks over this period. Remember, these returns begin before 9/11, at a time when Enron still existed, there we no troops in Iraq or Afghanistan, the banking system was no where near collapse, and Greece was just a nice place to vacation. So remaining calm and patient did pay off in the long run.  We need to remember this when the next disaster strikes, and let's hope it isn't in September.

(Note: The returns in the table are for indices, which we can't actually invest in.  The returns do not represent actual returns for portfolios managed by Bond & Co and are shown for illustrative purposes only.)