Insight: More Bears are Growling

The widely followed Dow Jones Industrial Average (DJIA) fell -365 points, bringing it perilously close to correction territory, which is generally defined as a decline of -10 percent from the recent peak.

The S&P 500 is already in correction territory having not fully recovered from the steep losses last August.  The rally in October offset most of the losses, but a new peak was not reached since last May.

While these results are obviously undesirable, other markets are close to or already in bear market territory, which is defined as a loss of -20 percent from a market peak.

Major indexes currently in a bear market include the Russell 2000 (-22.0 percent), the Russell microcap index (-24.5 percent) and the MSCI EAFE EM index of emerging market stocks (-32.1 percent from the recent peak, but it never actually recovered to the 2007 high).

Other indexes are coming uncomfortably close like the S&P 400 midcap index (-17.8 percent) and the MSCI EAFE index of developed market stocks (-17.3 percent).

Only Real Estate Investment Trusts (REITs) look better, but they are still down -9.1 percent from their peak last January.

Listing these numbers might make you feel like your diversified portfolio is harming rather than helping you.

If you only look at the past few years, there’s some truth to that, but we have always and will always preach taking a longer view than just a few years.  (Fun fact, we considered the name “Long View” instead of Acropolis way back when.)

When we extend our gaze to the lifetime of our firm, having the other asset classes have either paid off in terms of higher returns or by lowering the volatility of the whole portfolio because the combination of two risky assets, as long as they aren’t perfectly correlated, lowers overall volatility.

Predicting the future is always nettlesome, but we believe that these asset classes will continue to pay off in the future over time.

We’ve seen it time and time again in the data, lived it over the life of our firm and when you look at the valuations and nothing else, most of the asset classes are much more attractive from a valuation standpoint.

Buying low and selling high sounds easy, but in practice, it’s pretty tough because for something to be low, there has to be some problem.

Think emerging markets: they’re dirt cheap, but who wants them right now?  Buying them today could turn out very well over a decade, but the next several years could be nauseating.

The other thing to keep in mind is that we’ve designed the portfolio knowing that emerging markets and microcap stocks are riskier than large cap stocks.  There’s a reason that these two asset classes are five percent of our equity allocation while large cap stocks are more than 40 percent.

As painful as it is to see these kinds of market losses in such a short time, it’s important to remember that we’ve taken returns like this into consideration in our financial planning models.  We know that markets go through bad periods – we formed during the tech wreck and did live through 2008.

Still we know that for a strategy to be successful you have to endure the downs along with the ups and it isn’t easy.

The phrase ‘patience is a virtue’ dates back to a poem from 1630 called Piers Plowman by William Langland.  I would like to update it to say that patience is a virtue and so is discipline because you need both to be a successful investor.