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Quarterly Newsletter - December 2001
The attacks of September 11 have very obviously increased the level of financial and political risk we face.
The range of possible outcomes is wider now. The best outcome would be very much better than would have
been imagined before the attacks, and the worst very much worse. The inevitable consequence is that the stock
market has been and will continue to be volatile. The immediate aftermath of the attacks was a sharp market
sell-off. Share volume set an all-time record on the day the market reopened after the attack, with nondiversified investors imagining the risk of losing everything. “Get me out at any price” – that was the thought.
In the month of September $29.5 billion was yanked out of equity mutual funds – the highest dollar total ever and parked in the safety of money market funds. The outflow continued in October. But, the worst did not
happen. It seldom does. The plunge was followed by a sharp recovery. The recovery started on September 21 –
at a time of great concern about anthrax and imminent military action in Afghanistan. Who would have
guessed that the market recovery would start at such a scary time? Many market timers have yet to be able to
pull the trigger on getting back in, and so have lost out on a 20% recovery. Our unflappable method has paid
off again. The attacks did not panic us out of the market, and so we are not now chasing it. How could we be
so composed? We are responsible for your money – and yet we did not panic, and neither did you. In the last
12 months, the S&P 500 has lost 12.21%, the international large capitalization markets (as measured by the
EAFE index) are down 19.19% and the average U.S. growth mutual fund is down 14.73%. Take a close look at
the one-year results of your portfolio, shown in the Asset Class Performance report. A year of very violent
events and market reactions, and yet your portfolio has held steady – with a small loss or a small gain. This is a
remarkable result, and we are proud of it. It happened because we are very diversified. Our portfolios contain
fixed income, real estate (REITs), domestic and international small capitalization stocks, and emerging
markets stocks. All of these have done better than the large capitalization growth stocks over this past year.
This wide diversification means we can tolerate risk that frightens away less experienced investors. We do not
know what the future holds – except to say that it will hold risk and volatility. Had the war in Afghanistan not
gone well, the markets would not have recovered. Future attacks or other setbacks may drive it down again.
We are in a recession now, and earning prospects for American companies are very bleak. Risk and uncertainty
is rife. In these times (as in all others) diversification and emotional control are the investors' friends. Emotions
are not a good guide to investing. The greed of the late 90s and the fear of the present times are both to be
ignored. The key to doing that is diversification. Another benefit of diversification can be found in the sad fate
of the employees of Enron. Employees who participated in the Enron 401(k) had a large percentage of their
assets in the company stock. The stock has gone from $80 per share to pennies. Million dollar 401(k) accounts
have been reduced to a few hundred dollars. If we have not recently advised you on your retirement plan asset
allocation send us a current statement and a list of the choices and we will help you avoid such risks. Over the
last year investors have seen returns fall not only for equities but also for short-term fixed income instruments.
Money market yields are now half or less of what they were a year ago. It is exactly at this time that people are
often egged into alternative investments promising higher yields. Limited partnerships, preferred stocks,
stable-value funds and mortgages have higher expected returns but higher (potential) returns always come with
higher risk attached. There is no free lunch in the financial markets. If you (or someone you know) are
considering cashing in your CDs, ask if anything has changed to make you willing or able to take on more risk.
If the answer is no then it is likely best to keep those CDs where they are. One last thing – more administrative
in nature. The attacks have had a negative influence on the U.S. mail service. We have noticed a large increase
in the mailing time of items sent to Schwab. If you live or work near a Schwab branch, consider making your
deposits at the branch rather than mailing them to Florida. You will get an immediate receipt and the money is
available for investing the same day. There is a branch two blocks from our office for those of you who
frequent Harvard Square. We would like to extend our warmest greetings to you. We hope the upcoming
holiday season will find you in good health and cheer. Jim and Dean
Excerpt: The attacks of September 11 have very obviously increased the level of financial and political risk we
face.
Post date: 2001-12-15 11:28:35
Post date GMT: 2001-12-15 15:28:35
Post modified date: 2001-12-15 11:28:35
Post modified date GMT: 2001-12-15 15:28:35
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