WEATHERING THE STORM

By Daniel Sexton, CFP®

Now that we have had a respite from what seemed to be a never-ending landslide in the investment markets, a few of our clients have started to ask “How close am I to getting back to where I was?” These conversations reminded me of an article I recently read in the July issue of Kiplinger's Personal Finance Magazine titled “When Will I Get My Money Back?” In the article, Kiplinger's examines the average annual return an investor requires in order to get back to even after suffering a 30% loss. The result is an incredible 43% one year gain.

But what about our clients? What kind of recovery would they need to get back to even? I broke out my calculator, but the result didn't feel right. I did it again and was relieved when I confirmed I'd been right the first time. Let me explain.

From the market high to the low (September 30, 2007 through February 28, 2009) our clients experienced an average loss just shy of 20%. To get back to even, they would need a one year return of 25% (assuming no withdrawals or new deposits). 25% you say! Is that good or bad? Actually it turns out to be very good as it could have been much, much worse.

During this same time period, the S & P 500 Index fell by a gut wrenching 52%! Thereafter, however, the S&P took off like a rocket gaining nearly 40% over the past six months. But even with that stellar rebound (and 40% is truly stellar), the S&P still needs to go up another 49% to get back to where it started. It is this result that drives to the heart of when we say, “He who loses least, wins!” Because for many investors outside of RS Crum, this long, deep market downturn is their reality, making the climb to get back to even far longer.

To further illustrate this point, the table below compares the rates of return needed to recover from the S & P's high to low market loss of 52% in comparison to RS Crum's of 20%:

*RS Crum Inc. Average Return from September 30, 2007 to February 28, 2009 (before fees)

Investors worldwide have experienced a Category 5 hurricane in the financial markets. As we begin to take the plywood off the windows and survey the damage, it is not all sunshine and rainbows. Dark clouds linger and there might be thunderstorms ahead. Our clients can take comfort knowing they have not been devastated. Their figurative homes are left standing and, although weather-beaten, are much closer to recovery than most. By fortifying holdings and minimizing losses, our clients will be able to recoup more quickly as our economy and investment markets gradually continue to stabilize and correct.

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