Newport Capital Advisers

DID YOU KNOW?

A Lost Decade of Stock Investing?

The S&P 500 stock index had an annualized loss of 1.59% for the ten years ended June 30, 2010, while the MSCI Emerging Markets Index earned 10.34% a year for the same decade. A million dollars invested in the S&P 500 Index on July 1, 2000 would have declined in value to $852,000, while one million dollars invested in the MSCI Emerging Markets Index would have grown to $2,670,000.

Investment grade bonds, as measured by the Barclays Capital Aggregate Bond Index, produced a 6.47% annual rate of return for the decade ended June 30, 2010, which means that the value of a million dollars invested in that Index would have grown to $1,870,000 in the decade.

If on July 1, 2000, one had invested 50% of a portfolio in the S&P 500, 20% in the MSCI Emerging Market Index and 30% in the Barclays Capital Aggregate Bond Index, and had rebalanced the portfolio to those targets annually, the portfolio return would have produced a total return of 4.34% per annum. One million dollars invested in that portfolio would have grown to $1,530,000.

Market Timing

Despite an intense focus on the daily and weekly direction of equity markets in financial media, it is time; not timing that has defined positive investment returns for many investors who have been resolute in their long-term strategies. The familiar tendency to anchor decisions based on recent experience may not serve most investors well because of the fact that all of the return for the S&P 500 in excess of three month US Treasury Bills since 1962 was produced in only 2.4% of the months (14 out of 576 months). Identifying those 14 months of profits and the many months of losses and break-even months is a risky strategy for those with a long term investment horizon. One dollar invested in the S&P 500 Index on January 1, 1962, with dividends reinvested and no tax paid would have grown to $71.13 at December 31, 2009. One dollar invested in three month US Treasury Bills would have grown to $14.32. However, if one invested a dollar in the S&P 500 on January 1, 1962 and missed the best 14 months of that index’s return, the dollar would have grown to only $13.39. Another way to state this fact is that all of the return of the S&P 500 was produced in just 2.4% of the time.

Hedge Funds

Newport Capital Advisers has actively researched and recommended hedge funds to its clients since its formation in 1995. That the vast majority of hedge funds execute strategies that are designed to reduce investment risk and limit the volatility of rates of return. Although most hedge funds do not outperform equity markets when they rise dramatically, those that have limited their losses during equity market declines have often produced much better than market index rates of return over longer time intervals after their high fees. Because hedge funds typically are in private partnerships that have limited visibility and access due to offering restrictions, it is difficult for many to get valid information about them.