March 9, 2009, is an important day in our shared history. We didn’t necessarily know it at the time as it took a few months for the significance of the day to reveal itself, but it was on this date when the financial markets hit rock bottom during the Global Financial Crisis (GFC). From that day forward the markets stopped their painful retreat and began to recover. That was ten years ago now, and as we reflect on those ten years, of course there are countless learnings and insights that could be highlighted as related to the GFC as a whole. However, there are just a few related aspects that I wanted to focus on with this anniversary upon us.

Be wary of the numbers.

Since the market bottom in early 2009, investors in a globally diversified equity portfolio have realized 15.3% annualized returns1 — returns well above historical long-term averages. At first glance, this is quite a tremendous run of performance. However, when we note that the 10-year time frame begins at the very bottom month of the market low, we have context for that rate of return that is critical.

We want to help CCM clients be keenly aware that this time period can be used to craft narratives to fit a particular story. Some investors could point to this stretch of great performance as a reason why the market could be ‘due’ for a correction soon. Or, active asset managers could point to this time period as proof of their ability to deliver strong, above-average returns. Whatever the case may be, we must be astute and wise while viewing returns in context in order to make intelligent decisions.

To illustrate this point, the chart below shows that if we were to look at that same globally diversified equity portfolio that has delivered 15.3% in annualized returns, but go back to October 2007 versus March of 2009 to evaluate performance, we would quickly see that it has delivered returns of just 5.6%. So, in a twelve year period which includes the market low, the returns are almost 65% less than what has been achieved over the past ten years since the low. The point being, a new story can be told simply by changing the time period analyzed, so we need to be careful not to draw conclusions from any one series of data. In the months that follow, we encourage you to be mindful of what you’ll be seeing for 10-year track records—without context, return data can be very misleading.

Data represents past performance. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Returns are based on data from Dimensional Fund Advisors’ Dimensional Equity Balanced Strategy Index. Specific components used are as follows: 20% S&P 500 TR Index; 20% Dimensional US Large Cap Value Index; 10% Dimensional US Small Cap Index; 10% Dimensional US Small Cap Value Index; 10% Dow Jones US Select REIT Index; 10% Dimensional International Marketwide Value Index; 5% Dimensional International Small Cap Index; 5% Dimensional International Small Cap Value Index; 3% Dimensional Emerging Markets Index; 3% Dimensional Emerging Markets Value Index; 4% Dimensional Emerging Markets Small Cap Index for the time period of December 2005 through February 2019. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

It was a painful, scary time … and we got through it.

CCM client portfolios were able to withstand that period in our history for the following primary reasons: discipline; setting aside ‘safe money’ as determined by the financial plan; and staying diversified.

Discipline – CCM clients exhibited tremendous discipline during that turbulent time. Discipline presented itself in two primary areas. First, by reducing spending during a time of great volatility. There has always been volatility, but this was the first time during our (then 20) years of advising clients, that the economics of the moment raised a cautionary flag to reduce spending across the board. Second, CCM clients adhered to our shared investment philosophy. This was so critical that we expand on it further below.

Safe money – A prudent financial plan starts with identifying, then making the appropriate allocation of dollars within the portfolio that need to be invested as ‘safe’ money. Safe, in this context, takes on two meanings. First, it means the underlying investment needs to be rock solid with very little risk, and second, it means there is a part of the portfolio that under all circumstances can be used to provide necessary cash flow. It is the counterweight to the growth part of the portfolio (stocks). At CCM, throughout the GFC our client portfolios contained short-term and high-quality fixed income—providing the greatest protection against principal loss.

Diversification – In this context, diversification as it relates to belief in the global economy. Billions of people around the globe are buying/consuming goods and services—and always will. A diversified investment experience that participates in that flow—even with its ups and downs—will capture the long-term economic growth that persists. Clients benefited from staying diversified in portfolios owning more than 13,000 companies around the globe.

Successful investing requires staying disciplined to your investment strategy, through good times and bad.

As an illustration, consider the experiences of these two investors:

Investor #1 – Before October of 2007, this individual invested in a globally diversified portfolio that held 60% stocks and 40% bonds, and didn’t panic despite the tremendous turmoil in 2008. This individual’s portfolio lost 38% from October 2007, to February 2009. However, the strong performance of global equity markets in 2009 and 2010 allowed the portfolio to grow and regain all of its lost value by December of 2010. By February, 2019, this investor saw a total cumulative gross return of 71%.2

Investor #2 – This investor also held the same globally diversified portfolio (60/40 allocation) in October of 2007, however, the market volatility of 2008 was too much, and so they decided at the end of 2008 to sell all of their investments and remain in cash until the markets calmed down. This individual sat out for one year, re-entering the markets at the end of 2009. Sitting out just this one year prevented the portfolio from regaining its lost value until October 2013, nearly three years later than Investor #1.

By February 2019, this investor saw a total return of 36%, roughly half of what was achieved by the disciplined investor example above.

What we observed in 2009, and in each of the years since, is that clients are best able to demonstrate this kind of critical discipline when they a) believe in their investment strategy, and b) have confidence in the financial plan that has been established for them with their advisory team. These reminders resurface as we see March 9, 2019 come and go, and think back on all that has transpired in those ten years. While many things have changed, one thing the GFC certainly reinforced is that sticking to the core, foundational tenets of prudent investing did not change, and served investors well.

Thank you for the privilege of serving you. Another reflection on this ten-year time period is that we weathered that time together. It is very rewarding to us to look back at how many of you were with us then and are still with CCM today.

  1. See source data referenced below chart in this article.
  2. Dimensional 60/40 Balanced Strategy Index. Source: Dimensional Fund Advisors.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.