Fourth Quarter 2009 Letter to Clients

Here’s a quick quiz for you:

Q: What was the worst decade for stocks since 1820?

A: According to the experts, you just lived it.

That’s right. The media and analysts have informed us that the decade of the 2000s was the absolute worst for stocks, ever. Worse than the 1970s. Worse than the 1930s. Worse than the 1860s. Worse than any other decade in the nearly 200-year history of the modern American stock market.

This is a staggering thing to comprehend when you consider all of the tumultuous events that America has endured in those two centuries: Civil wars, world wars, natural disasters, depressions, recessions, inflation, deflation, assassination, resignation, bubbles, busts and panics. And, of course…Disco.

Yet despite all of the turmoil that has spanned the decades, the experts tell us no decade was worse for stocks than the 2000s, as evidenced by the S&P 500 index’s -0.95% annual return during that time – the only negative decade that index has ever had.

To be sure, the 2000s were tough times. It was a decade that opened with the bursting of the tech stock bubble and closed with a financial panic the likes of which we haven’t seen since 1929. In just nine short years we experienced not one, but two of the worst bear markets in history. Had it not been for the meteoric recovery in the stock market the last nine months of 2009, the historical record of the 2000s would look far worse.

True, also, that lots of folks were wiped out these past ten years. People who held concentrated positions in tech stocks in 2000 and bank stocks in 2008 lost their shirts. Folks who piled into Internet mutual funds the first part of the decade or leveraged hedge funds the last half of the decade lost it all. Then, of course, there were the frauds: WorldCom and Enron. Madoff and Stanford. The former were corporate in nature, the latter individual, but all of them had the same effect: they turned millionaires into paupers overnight.

But there is another story line to all of this that the media has, not surprisingly, failed to pick up on; an angle that undercuts all of the angst and drama that is being ascribed to the first decade of the second millennium:

An investor who began the decade with a well-diversified portfolio and stayed the course came out just fine.

Wait. What? How can this be? It was, after all, the worst decade for stocks EVER! In two hundred years! If you looked backed on your family history and found that poor ol’ uncle Ichabod had the misfortune of investing during the worst decade in two centuries, you would assume he lost the entire family fortune. So how could an investor – even (gasp!) an all equity investor – have emerged from such a tragic period of time with gains? Surely it must have been the work of magic and market timing! Wizardry and wonderment!

Nothing of the sort. As it turns out, all of this was possible with a well-constructed portfolio, because it also turns out that – shocking as this may be – the large cap stocks that comprise the S&P 500 index and Dow Jones Industrial Average are not the only stocks in the world available to invest in. In fact, they are only a small fraction of the stocks available to invest in.

When you dig deeper, beyond the easy observation that the S&P 500 finished the 2000s with a negative annual return, you learn that this was not the same story for other sectors of the market.

Consider the following chart showing the ten-year annualized returns of four of the equity asset classes we use in the Partners+Program portfolio strategies (note that these are index returns, not actual fund performance): 



10 Yr. Annualized

Russell Mid Cap Value

Midcap Value


Russell 2000 Value

Small Cap Value



Intl. Small Cap





It turns out, then, that the 2000s were not an unmitigated disaster for stocks – just some stocks. This is where we go back to the phrase “well-constructed portfolio.” When we build our portfolio strategies, we include these and other asset classes to provide a buffer to our allocation to large cap, U.S. stocks. This buffer does not always help; in the late 1990s, for example, every major equity asset class trailed the large cap stocks of the S&P 500. Back then the experts told us there was no need for diversification as the other asset classes only “drag on returns.”

The 2000s showed us otherwise. It was a decade that proved beyond a shadow of a doubt that asset allocation does work in even the most dire of decades. Not always quickly, and not always in every short-term market environment (as we saw in the fall of 2008), but slowly and methodically over the steady march of time.

No magic required.

* * * * *

In our client letter from exactly one year ago we included a chart that provided a compelling illustration of the history of bear markets and bull markets over the past century.

We provided the chart as, one might say, a faith-based initiative: The stock market was in a downward freefall and we wanted to give our clients some historical context about the nature of bear markets and the recoveries that inevitably follow. We wanted to help our clients keep the faith when folks all around them were losing theirs and bailing out of the market.

Today, that chart looks downright prophetic, so we thought we would include it again herewith:

While this chart goes only through July 2008, we have seen the pattern continue on since that point. After the 53% dive the S&P 500 took from October ’07 through March ’09, we have since seen that index climb more than 60%.

That seems like a tremendous gain in a short period of time, but when you place it in the context of the above chart, it actually seems historically typical. In fact, it is historically low relative to the depth of the bear market we saw from 2007-09. So while stocks have indeed come a long way from their March ’09 lows, it is no foregone conclusion that the bull market has run its course.