The more I read from Shane Oliver, the more I become impressed with his balanced assessment of the current economic and investment conditions.  Over the weekend I read an article of his published in the Australasian Investment Review, a freely available online publication - Super Returns: Don't Be Greedy.

In the article Mr Oliver provides an analysis of the medium term return potential in investment markets.  He begins by commenting that recent returns from 2003 to 2007 were well above sustainable levels.  This is an opinion that we also subscribe to.   He goes on to look at indicative return expectations for the medium term using some simple models.

From these models he provides the following projected returns:

Oliver confesses that there are some drawbacks with the models particularly in terms of dividend yields but overall he is comfortable with the results.

Based on his data, investors with a reasonably balanced portfolio would be looking at 5.5% real returns (after the impact of inflation) over the medium term.

This figure is very consistent with the figure we use for projections for our clients regarding likely investment returns.  (We also consider a draw down rate of 5% in real terms as sustainable in retirement.)

The key message for me from Shane Oliver's analysis is that we all need to be realistic about the returns we should expect from our investment portfolios.  We would all love these returns to be higher, and maybe we will see a strong bounce back over the next few years.  However we need to be prepared that throughout history growth asset investment markets have tended to provide returns of 5 to 6% above inflation.  If you plan using these expectations and develop your portfolio so as to avoid the erosion of returns through high fees and heavy trading strategies you are much less likely to end up disappointed with your investment experience.

Take a look at our Building Portfolios page for more information on our approach to building investment portfolios.

Regards,

Scott Keefer

In his latest article written for Alan Kohler's Eureka Report, Scott looks at Centrebet's introduction of betting on interest rate outcomes and parallels this with investors using derivatives markets.

Click on the following link to read Scott's analysis - Rate cut the short-priced favourite.

In his latest article written for Alan Kohler's Eureka Report, Scott looks at whether it is really worth borrowing to invest in share markets.

Scott concludes that "Borrowing to invest remains a legitimate way of increasing the expected return of a portfolio, offering investors tax benefits, but these higher returns come at the cost of significantly increased portfolio volatility. Investors should be aware of this cost, the bias the financial services industry has toward borrowing to invest and the power of the simpler strategy of investing regularly over time in growth assets while building a passive income stream. They should consider all this before deciding whether the risk of borrowing to invest suits their situation. "

Click on the following link to read Scott's analysis - Is share gearing worth it?.

Now that the Beijing Olympics is done and dusted we wanted to put an economic spin on the results.

You may have become aware of the Sunrise program's (Channel Seven) Adjusted Medal Tally comparing Australia's results to the USA based on a per capita basis.  The results were very flattering to Australia.

We took this approach a step further and analysed the results of all the countries who won medals at the Olympics comparing the number of medals with the country's GDP from 2007 measured in US dollars.  The GDP data was taken from the International Monetary Fund's World Economic Outlook database - www.imf.org/external/pubs/ft/weo/2008/01/weodata/index.aspx

The top 10 countries on this basis were:

Other notable ranks were:

If we only were to look at gold medal winners the top ten were:

and

This just puts another perspective on the Olympic results.  I wouldn't be advising using the tables as a source of picking the best performing share markets for the next year.  Zimbabwe is not somewhere I would be throwing cash at the moment.  It might just be worth keeping an eye out though, as going on the record of forecasters this table could be as useful as some of the more classical methods of forecasting.

One definite use of the data is that it will hopefully quieten down a few of our friendly poms who, according to my sister living in London, are pretty happy with themselves given the success of the UK in the Olympics. (I think unbearable was her term!!)

Not so good when conversing with our friends from across the ditch in New Zealand who yet again seem to have been able to fight above their weight!!

I hope those who are interested in the Olympics have enjoyed the past two weeks and let's hope the euphoria is contagious for our share markets!

Good luck to our Paralympians!!

Regards,

Scott Keefer

Feedback from users of our website has recommended that we provide links to other relevant financial media commentary.  You may have noticed that we have linked to relevant commentary from sources like Fundadvice.com, Vanguard commentary, Dimensional Fund Advisors commentary, articles from the Australian newspaper and the Australian Financial Review to name a few.

Today I have read a blog Pride, predictions and a falling dollar written by Robin Bowerman, Principal and Head of Retail at Vanguard.  It highlights the impacts of the recent fall in the value of the Australian dollar in terms of foreign currencies. i.e. the exchange rate.

As with all movements in financial markets there are winners and losers.  The losers at the moment are those individuals and businesses who are importing goods or who are planning on travelling overseas either temporarily or permanently, assuming you do not have other currency to support this travel.

The winners are businesses who are exporting goods (based on variable price contracts) and investors who are investing in un-hedged international investments.

Let's first have a look at the impact of currency movements on investors who invest in international investments.

Back in April 2001, the Australian dollar was being exchanged for 48 US cents.  I was well aware of this as I had just re-located to Indonesia and was being paid in US dollars.  I was pretty happy with the exchange rate as every US dollar I saved resulted in 2 Australian dollars reaching my accounts back in Australia.  When I left Indonesia in December 2003, the exchange rate had risen to 1 Australian dollar buying 73 US cents.  One US dollar of saving would result in $1.36 reaching my Australian accounts.  The exchange rate eventually rose to 97 cents in mid July.  This equates to a 102% rise since April 2001.

If you had hedged your international investments in Australian dollars over the past 7 years you would be well ahead of those who had left their international investments un-hedged.  Let's use a simple mathematical example to show why this is the case.

Say you had invested $1,000 Australian dollars into a US dollar investment back in April 2003, you would have been able to buy 480 US$1 dollar units.  Let's assume that these units rose to a value of US$2 by mid July 2008, you would now have an investment of US$960.  At an exchange rate of 97 US cents to the Australian dollar, if you had redeemed this investment you would have received back $931.20 in Australian dollars.  Your investment had actually fallen in Australian dollar terms by $68.20.  An alternative would have been to hedge this investment against movements in the exchange rate.   Basically, hedging takes out the impact of currency movements and transaltes returns on the underlying investments back into the home currency.  If you had invested the $1,000 into a US investment hedged back to the Australian dollar, you would have received $2,000 back in your hand (assuming that it cost nothing to hedge).  I know which option I would have preferred.

Of course now that the Aussie dollar has fallen over 10% in recent weeks the opposite result is evident.

Before you go screaming out and selling hedged international investments to buy un-hedged international investments, spare a moment of reflection.  As Robin Bowerman points out, currency risk is another risk in the marketplace and as with other levels of risk it is very difficult to predict the movement of this risk (i.e. the movement of the currency).  The exchange rate could quite easily swing back around and reach parity with the US dollar, something that has been predicted to occur.

If you have a long term outlook, as Bowerman points out, the impact of currency seems to be negligible.  Actually there is a small cost involved with hedging so some might say, as do we at A Clear Direction, that you are better off leaving international investments un-hedged.  Other reasons for coming to this conclusion are the tax ineffectiveness of hedging and the international investments become more closely correlated to the Australian market and as a result provide less diversification for your overall investment portfolio. 

One last comment though, an area of international investing we do favour a hedged approach is in international property.  If you are expecting significant flows of income back from an investment, like property has provided, it may well be worth considering a hedged position to be more certain about the income flows back into portfolios.

It will be interesting to see where the Aussie dollar ends up.

Vanguard Investments have put together a really useful chart plotting the volatility of the Australian share index since June 1978.  On the chart they have highlighted 7 significant share market falls of more than 10% over that period.  The chart also tracks the length of the decline and the corresponding time taken to recover from the decline. - Click here to be taken to the chart - Australian Share Market Volatility

The average fall has been 21.2% with the average decline of 8.6 months.  The more positive part of the chart shows that the average recovery period has been 15.3 months.  Another statistic that is not included on the chart but has been widely reported is the average rebound from market lows over 12 months which has been 34% in Australia.  See Vanguard's Robin Bowerman's blog for further commentary - Looking Back.

So where is the current Australian market?

The most recent low was reached on the 5^th of August with the ASX200 falling to 4,758.5.  The high can be tracked back to the 1^st of November when the ASX200 reached 6,851.5.  This is a fall of 30.55% over a period of just over 9 months.  Comparing this to the past 30 years, this decline is one of the more severe (or has been one of the more severe for those who's glass is half full) - 3^rd worst out of the last 8.

What insights can we learn from this data?

If you do not believe in market timing, then this data clearly shows the risk of pulling out of the market after the market has had a significant decline.  Especially now after the market has already fallen over 30%.  It could go further.  The largest decline has been 43.5%.  But the possible 12 month rebound, based on averages, would outstrip this further fall.

For those with a very long investment timeframe, the graph shows that the share market has always rebound and kept rising over time and overcome the market declines that are inevitable.

If you do believe in market timing then we would love to hear from you.

Of course, it could all be different this time.

Users of our website, through our User Voice feedback forum, have requested that we regularly update the graphs outlining the performance of the Dimensional trusts that we use in building portfolios for clients.  In response to this feedback we have updated these graphs to reflect performance up to the end of July 2008.

The graphs show negative returns in the Australia market and flat returns for international markets over July.

So far during August,  all the Dimensional trusts, except the Australian Small Company Trust, have seen improved returns with the global trusts, except the Emerging Markets trust,  experiencing greater than 6% improvements.

Overall, the graphs continue to clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist.  Please click on the following link to be taken to the graphs - Dimensional Fund Performance Graphs.

For anyone new to our website, it is important to point out that we build investment portfolios for clients based on the best available academic research.  Take a look at our Building Portfolios and Our Research Based Approach pages for more details.  In our view, this research compels us to use the three factor model developed by Fama and French.  In Australia, the most effective method of investing using this model is through trusts implemented by Dimensional Fund Advisors (www.dimensional.com.au).  We do not receive any form of commission or payment from Dimensional for using their trusts.  We use them because they provide the returns clients are entitled to from share markets.

However, academic theory is nothing if it can not be implemented and provide the returns that are promised by the research.  Therefore, we like to provide the historical returns of the funds that we use to build investment portfolios.

Please let us know if you have any feedback regarding these graphs by using the Request for More Information form to the right or via our User Voice feedback forum.

Regards,
Scott Keefer

Today we have integrated a new page into our website focussing on the seminar presentations that we are making to our clients, prospective clients and other interested groups.  Scott Francis in particular has conducted a ranged of presentations to groups such as the Australian Investors' Association, the Australian Computer Society - Young IT Professionals and also school student groups over recent years.

The initial page features videos from Scott's recent presentation at the Australian Investors' Association National Conference held on the Gold Coast.  The presentation dealt with asset allocation and correlations.

Please click on the following link to be taken to the page - Financial Seminar Presentations.

Each week the Eureka Report publish the best letter to the editor for the week along with a reply from the author.  In this week's Eureka Report the letter was directed at Scott's recent article - What price index funds?.

The questions posed were:

- Is there a difference between Vanguard's managed fund, which attempts to replicate the ASX 200 and the stockmarket traded share from State Street, SPDR S&P/ASX 200 Fund (ASX:STW)?

- Are there particular merits in either product or are they really much the same in terms of price, dividends, 'management fees', net tangible assets, etc?

- Are there other ASX 200 index-type funds out there that I'm missing?

In his reply, Scott points out that the tax effectiveness of alternatives as well as cost are two items to be looked closely at.

Click on the following link to be taken to the letter and Scott's reply - Reply to letter of the week.

In my scanning of the financial press over the past few days I came across an interesting item reported by Financial Standard - 'ANZ Super cuts options by 40pc'.  The article reported that the trustees of the ANZ Australian Staff Superannuation Scheme had overhauled its Australian and International equities portfolio by appointing new managers.  By doing so they suggest that investment costs will fall by 40% from current levels for the aggressive and balanced investment options.

This is great news for members of the scheme.  For those of us who are not members we can still learn a lot about how the trustees have managed this outcome.  A large part of the answer comes from the investment style undertaken by the fund managers they have chosen.

No prizes for guessing that the core investment style being employed both in the Australian and International context is index investing.  We are not shy in stating on our website and in our communications - index investing keeps fees lows.  As the article reports "Both core managers will adopt a passive investment style, with the aim of matching or exceeding marginally the investment performance of the Australian and international share markets respectively."

Within the Australian equities component of the scheme, the trustees have appointed Macquarie Investment Management as the core manager with 70% of Australian equities now invested in the Macquarie Pure Index Fund.  I tried looking for more information on this fund but kept coming to the Macquarie True Index-Linked Australian Shares Fund.  The reported management fee for this fund is 0.103%, very cheap.  One downside, this not actually a pure index fund as it employs an arrangement with Macquarie Life to guarantee that the fund does not underperform the actual index but the principle stands.  Knowing Macquarie, they have to be earning more than 0.103% so it is safe to suggest that the risk of the underlying investments are greater than what would be undertaken if you held a pure index fund and therefore returns are actually higher than index returns with Macquarie skimming off the premium.  The fund profile actually suggests that shares outside the actual index may be used.

Within the international environment the trustees have appointed Barclays Global Investors with 70% of international equities invested in the BGI Fission Index Fund.  The trustees suggest that information on this fund is not publicly available.  The only information I have found states that the fund guarantees that it will match the MSCI World - ex Australia Index return plus add a small premium.  The fund does not officially charge management fees.  Unfortunately it does not indicate what investments it undertakes to guarantee the index return and how much risk is taken on.  BGI have to be making money somewhere so you can expect that the investments are not pure index investments and contain extra risk for investors as compared to holding pure index investments.

Turning a blind eye to the manufactured index approach undertaken by Maquarie and BGI for a moment, the underlying principle of reducing costs through employing a passive investment approach is extremely sound.  It is what we recommend for our clients without the funky use of derivatives or other strategies to guarantee index returns - just pure index investments. (Check out our Building Portfolios for more details.)

All of this is particularly fascinating given that this is the superannuation scheme for staff of one of the 4 major banks in Australia - the ANZ.  For those who were not aware, ANZ partner with ING Fund to run the funds management arm of their businesses.  The majority of the funds they promote through this joint venture have an active approach to investing with fees ranging from 1.44% to 2.9%.  The lower fee options are actually Vanguard Index funds which can be purchased directly through Vanguard for 0.75% retail.

Obviously the trustees of the ANZ Staff Superannuation Scheme do not follow the ANZ/ING fund management approach and prefer to use an index approach.  Interesting how things change when the people at ANZ are investing their own assets for retirement and not the assets of their clients.

There is no hiding that share markets around the world have had a poor year to the end of June 2008, and July has not provided any real comfort.   History tells us that there will be an upswing in returns but unfortunately it does not provide us a guide to the exact date of that turn around.  It could be tomorrow, in a month, the next quarter, a year or even multiple years time.

A number of investors may be now sitting in the position where they have accumulated cash and are pondering whether it is time to be buying into growth assets.  This could be through accumulated savings, hesitancy to invest over the past 9 months or you may be the holder of managed funds and have recently received income distributions into your portfolio.

If you take the decision to buy into growth assets a wise option would be to undertake a dollar cost averaging approach.  So what is dollar cost averaging and how might it protect you from downside risks?

The following is taken from Scott Francis' latest book - A Clear Direction - Your Guide to Being a Successful CEO of Your Life

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Investing regularly over time is sometimes given the 'Flash Harry' name of dollar cost averaging.  It is called this because if you keep adding investment amounts regularly you buy more of an investment if prices go down and less if prices go up - tending to average out your entry price over time.

In the first chapter of 'A Clear Direction - Your Personal Finance Guide' I indicated that I felt there was a bias towards the use of the phrase 'It's time in the market, not market timing that counts' within the financial services industry.  I feel that this bias comes about because promoting the idea that provided you leave an investment in the market for three to five years you will make a reasonable return, means that there is never a bad time to invest.  For commission based financial planners who earn their money through distributing financial products, and for fund managers who charge a fee based on the percentage value of assets that they are managing, the fact that it is always a great time to invest means it is always a great time to take clients' money - which is great for their own profits.

The reality is quite different.  For example, if you had invested a sum of money in the stockmarket in July 1970, it would have taken until July 1985 for you to receive a positive return above the rate of inflation.  Even without considering inflation it would have taken eight years to have the investment return to its purchase value again.

If you had invested $10,000 into Australian Shares in July 1970 by July 1985 that portfolio would be worth $27,454.  This sounds impressive.  However because of inflation by July 1985 $27,454 would only buy you the same amount as $10,000 would in July 1970 - all in all a disappointing investment return.

If, rather than invest the $10,000 all at once, you had invested $1,000 a year for each of the first ten years by July 1985 your investment portfolio would have been worth $30,245, an investment return nearly $3,000 stronger.

This is a demonstration that in times of volatile markets, such as during the early 1970's, the strategy of regularly investing smaller amounts of money can be an effective one - more effective that just assuming any time is a great time to invest and blindly investing money.  Of course there are periods of strong investment returns where it would be better to simply invest the $10,000 up front.  Just as the strategy of investing small amounts regularly helps smooth volatility that will protect against losing capital in less attractive markets, it will reduce your investment returns in more attractive investment markets.

It is also practical to assume that most people will set their investment goals and invest periodically.  For example, they may decide to save and invest $5,000 a year, so the practicality is that they will be investing regularly over time, which we have seen is a prudent way to enter investment markets, allowing them to use any downturn in investment prices as a buying opportunity, and smoothing market volatility.

Let's assume that a person decides to invest $1,000 at three different times into an Australian share, called share X.  At the first point of investment the price of the share was $1, so she purchased 1,000 shares.  At the second point of time the price of share X was 50 cents, so she bought 2,000 shares.  At the third point of time the price of share X was $2, so she bought 500 shares.  The share price then fell back down to $1.  At this point in time she had 3,500 shares, worth $3,500.  So, even though the price of these shares is the same as when she first bought them, dollar cost averaging means that her $3,000 investment now has a value of $3,500.

To look at a realistic example of regular investing over a period of time I put together a model based on the time between July 1970 and July 2005, a 35 year period.  I assumed that a person worked and earned the average weekly wage for each of these years, as per the Australian Bureau of Statistics (ABS) figures for each year.  Each year they contributed 5% of their income.  This means that in 1970 they contributed around $185 through to 2005 where they invested nearly $2,000.  I have assumed that they invested all their money in Australian Shares, and reinvested all dividends.  I used the actual returns from the sharemarket over this period.  If they did this, by July 2005 they would have an investment portfolio valued at $288,000.  The effect of compound interest is that they would have only contributed $36,410 over the 35 years.  The remaining value of the portfolio is made up of investment returns.  While this example has not taken into account tax, the final balance is significant.

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How to apply this?

Since early 2007, we have been advising new clients, and existing clients with new money to invest, to gradually ease into growth markets through dollar cost averaging.

This strategy, combining the effect of compounding interest with regular investments to smooth some market volatility, requires the discipline to start investing as soon as possible and to regularly allocate funds to your investment portfolio.

It is a two step process which involves:
1. Identifying how much you can put towards long term investments on a regular basis and;

2.Deciding how you are going to actually invest, using either index funds, actively managed funds or choosing investments directly (or a combination of all three).  If you choose a managed investment then you should establish a regular investment facility to keep building your investment over time.  If you choose to invest directly yourself, you should open a high interest investment bank account where you can regularly build your savings until you are ready to choose the next investment.

For more information on our approach to building portfolios please take a look at our Building Portfolios page on our website.

Today we have updated the Building Portfolios page on our website to include Dimensional performance data up to the 30th June 2008.  The data continues to show the premiums for small, value and emerging market trusts over the standard index returns (as reflected by the Large Company Trust performance).

Australian Shares:

The following tables represent the Australian share returns in two ways.  Firstly is the average annual return over 5 years followed by the growth of $10,000 invested over 5 years.  All returns are after Dimensional fees, and returns are to the end of June, 2008.  As you can see the performance of the actual funds show that small companies and value companies, invested in a strategic way, provide a higher return than just the index return ( with the Dimensional Australian Large Company Trust reflecting the index return).

Average Annual Returns: 

Growth of $10,000 Invested:

International Shares:

Within International shares these same sources of return premiums from value and small companies can be found. 

There is also an extra sub-category to add to this mix - companies in Emerging Markets.  Emerging Markets are those that are not yet developed but have significant potential for growth.  Consequently they also are riskier and therefore can provide an extra risk premium for an investor who is comfortable to take on this extra risk.  Our preferred fund, Dimensional Emerging Markets Trust, holds shares in companies listed in Argentina, Brazil, Chile, China, Czech Republic, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Philippines, Poland, South Africa, South Korea, Taiwan, Thailand, and Turkey.

While we have not gone into as much detail with our returns data, the three year and five year returns show the value and small company premium over the index (the Dimensional Global Large Company Fund being close to the index return), as well as showing the effectiveness of the Emerging Markets fund.

Average Annual Returns:

Growth of $10,000 Invested:

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the Colonial First State Imputation Fund.

Scott's analysis is not favourable based on the following criticisms - poor performance,closet indexing, tax inefficiency and costs.

Click on the following link to read Scott's analysis - A popular way to lose money.

The financial media are doing their best to hook in readers (so they can sell their advertising space) with a number of doomsday type news items being pushed on to front pages and lead stories.  To be frank, there has been a fair bit of less than positive news out there in the financial world. The question that needs to be asked is whether this time is any different from the past?

Weston Wellington, a Vice President at Dimensional Funds Advisors in the USA has posted commentary on his monthly opinion column that asks this very question.  In response Weston provided a number of media examples which highlight a number of "unprecedented" events which confronted investors in the past:

"On Wall Street, the most unnerving stock market reports since the Depression 1930s became daily more dismal." Time, "The Economy: Crisis of Confidence," June 1, 1970.

"Fed up with rising food prices, thousands of women took to the streets in protest. . . . [President Nixon] announced that ceilings were being imposed on prices of beef, pork and lamb." Time, "Changing Farm Policy to Cut Food Prices," April 9, 1973.

"The only way that the US can scrape through the next several years without major economic and social disruptions is to ease off dramatically on energy consumption." Time, "The Arabs' New Oil Squeeze: Dimouts, Slowdowns, Chills," November 19, 1973.

"There have been multiplying signs that the long American romance with the big car may finally be ending. . . . Economists generally are agreed that the era of readily abundant fuel has ended for good." Time, "The Painful Change to Thinking Small," December 31, 1973.

"Investors have been frightened of an economy that seems out of control. . . . The stock market has scarcely been so shaky since 1929. . . . A Gallup poll published last month found that 46% of adults feared a depression similar to the classic one of the 1930s." Time, "Seeking Relief from a Massive Migraine," September 9, 1974.

"The woes of inflation and stagnation have touched nearly every American, but while some people are only slightly bruised, others feel as if they have gone ten rounds with George Foreman and are down for the count. . . . Pawnbrokers are gaining from once affluent people who have lost their jobs and are trying to get anything that they can out of jewelry or expensive cameras or appliances." Time, "Who Is Hurting and Who Is Not," October 14, 1974.

"Financial markets at home and abroad have been devastated in recent weeks as frantic traders and investors scrambled to come to grips with the anti-inflation policies of the Carter Administration and the Federal Reserve Board. . . . After a nervous September, Wall Street succumbed to despair, and the stock market was bloodied by what is being called the October massacre." John M. Lee, "Tumult in the Markets," New York Times, November 6, 1978.

"Fortunes were conjured out of thin air by fresh-faced traders who created nothing more than paper." Walter Isaacson, "After the Fall," Time, November 2, 1987.

"The next recession won't look like any that has preceded it in recent decades. . . . We are so heavily indebted that a slump would quickly turn into a Latin American-style depression." Ashby Bladen, "Borrowing to the Bitter End," Forbes, September 4, 1989.

"Chase Manhattan, the second largest US bank, is letting go 5,000 employees, or 12% of its work force, in a struggle to remain solvent. . . . The construction industry has creaked to a virtual halt after a decade of overbuilding. . . . From stock markets to supermarkets, high anxiety rules the day. . . . Now the specter of war, rapacious oil prices, and a far-reaching recession haunts political and business leaders everywhere. . . . The banks are basically pushing panic buttons everywhere."

"I want to say we're in a recession, but that's not a strong enough word. In some regions, it's a depression." John Greenwald, "All Shook Up," Time, October 15, 1990. Final quotation attributed to William Hensler, chief executive, Wickes Lumber.

"Imagine every office building in Manhattan empty, a commercial ghost town. Now double it. That's how much vacant office space?500 million square feet?there is in the United States today. Behind much of that empty office space stands the nation's banking system. . . . The worry today is that the real estate recession, which is spreading nationally, could severely weaken the banking system, pulling down many smaller banks and a few big ones as well. . . . 'Our real estate market is as bad as we've had since the 1930s,' said Leo Spang, a Boston banker and president of the Real Estate Finance Association, a trade group." Steve Lohr, "Banking's Real Estate Miseries," New York Times, January 13, 1991.

"Falling real estate prices and the fragile state of the banking system make this recession unlike any other and extremely difficult to forecast." John R. Dorfman, "First Boston's Bear, Carmine Grigoli, Refuses to Stop Growling Despite Stocks' Big Rally," Wall Street Journal, February 7, 1991. Quotation attributed to Carmine Grigoli, chief investment strategist, First Boston Corp.

"The nation's top auditor said today that many more banks were effectively bankrupt than regulators had recognized. . . . 'The bank insurance fund is nearly insolvent, and I cannot overemphasize how important it is to restore it as quickly as possible,' Mr. Bowsher [Comptroller General] told the Senate Banking Committee." Stephen Labaton, "Bank Deposit Fund Nearly Insolvent, US Auditor Says," New York Times, April 27, 1991.

"We're going into one of those long periods where the market does nothing except consolidate this huge move up we've had. Dow 4000 is going to be with us for a long time." Daniel Kadlec, "Will Weary Legs End 20-Year Bull Ride?" USA Today, December 6, 1994. Quotation attributed to Seth Glickenhaus, senior partner, Glickenhaus & Co.

"This economic convulsion is unprecedented in the post-World War II era." Robert J. Samuelson, "A World Meltdown?" Newsweek September 7, 1998

"This time it is different. This time the market won't be so quick to bounce back. . . . Who can look at the world right now and not conclude that things have changed dramatically?" Joseph Nocera, "Requiem for the Bull," Fortune, September 28, 1998.

"Wall Street stocks have plunged?Merrill Lynch down 59%, Morgan Stanley down 59%, and Lehman Brothers down 67%. . . . The real problem is with the risks that are unquantifiable." Bethany McLean, "Can the Brokerage Stocks Come Back?" Fortune, October 26, 1998.

"Investor nervousness pushed stock prices lower yesterday and sent signals of distress through the corporate bond market. . . . Many companies are overloaded with debt at a time of slowing economic growth. Among the stocks leading the decline yesterday were those of companies sensitive to the business cycle. . . . A Morgan Stanley index of 30 of these stocks plunged 4.7 percent yesterday, reflecting the worry that the economy may be headed for another recession." Jonathan Fuerbringer, "Negative News from Some Blue Chips Takes Heavy Toll," New York Times, October 10, 2002. [Note: major US stock market indexes registered multi-year lows on October 9, 2002.]

We are the first to acknowledge that it is not an easy time on markets at the moment.  (what an understatement!) Reading the examples provided above shows us that similar difficulties have been faced in the past.

What transpired after these events?  Markets rebounded, often very quickly.

Now is not a time to sell all your growth assets.  If you had of done so in late October, early November last year you were a genius but doing so now would see you locking in your losses and missing a possible rebound in markets.  This would only serve to further damage your portfolio.  We can not be sure when this rebound will occur but history tells us it will.

Regards,
Scott Keefer

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the performance of the BrisConnections tollway float and how it has destroyed $250 million of investor wealth.

Click on the following link to read Scott's article - The IPO that died of shame.