For example, $1.00 invested in the S&P 500 Index at the market trough at the beginning of March 2009 would have grown to $2.29 – more than doubling in value – by the end of September 2013. This is very similar to the growth of the S&P 500 Index thirteen years earlier during the dot com bubble. From the beginning of March 1996 through the end of September 2000, $1.00 invested would have grown to $2.26 after peaking the prior month at $2.39 – nearly identical growth to the current period, with similar levels of volatility. While we do not imagine that the performance of the market in a previous period could forecast its movements more than a decade later, it is nonetheless instructive to look at the subsequent decline in the dashed line. Over the following two year period, growth stocks led the market lower – the S&P 500 Index retreated from the peak of $2.39, destroying capital and leaving our hypothetical investment languishing at $1.28 by the end of September 2002.
We prefer well designed, carefully implemented, “safety first” approach to investing. For me, this is the right investment philosophy and approach. I believe it is the morally right thing to do as a fiduciary entrusted with client assets to manage. I believe it is our duty to guard investment capital. We employ a value-oriented approach to security selection and a systematic approach to active risk management. Our focus on dividend-paying stocks is intended to provide an additional margin of safety and to buffer the portfolio from the effects of inflation and market downturns. By focusing on finding value, we seek to identify securities with a higher likelihood of purchase at low prices and sale at high prices. In contrast, growth-oriented approaches attempt to “buy high and sell higher”, often with no dividend protection – a recipe for investment disaster in my opinion. It is important to mitigate the many behavioral biases that can damage investment results. Irrational decisions made in the face of incomplete information, emotional responses, uneven responses to reward and risk, hindsight bias, and overconfidence are problems across the investment landscape, especially when the investment process is highly subjective. In contrast, we designed a rational, systematic approach that is intended to avoid these issues to the extent possible.
Currently I drive a Jeep. It combines all the reliability and dependability benefits of the old Rover with comfort and performance closer to the sports car – but without either car’s issues. It is a safe vehicle. It is a reliable vehicle. It’s the best of both worlds. It gets me where I want to go, consistently and comfortably.
In 2014-2015, could we experience a decline such as the one that occurred in 2001-2002? Only time will tell. The best approach to investing is designed to get clients to their investment goal primarily by attempting to avoid permanent and unacceptable losses of capital. It’s an approach designed to keep working under any conditions, capturing a healthy amount of bull market gains while seeking safer results in choppy and bear markets.
Craig French is a portfolio manager at WBI Investments and can be reached at www.wbiinvestments.comThe firm manages $2.3 billion for investment advisors and their clients in high yielding dividend paying stock portfolios.
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