Opinion: Ignore this stock market anniversary at your peril
Financial disasters like Lehman Brothers' collapse can occur at any time
Getty Images CHAPEL HILL, N.C. (MarketWatch) — The most crucial investment lesson to draw from Lehman Brothers' bankruptcy — which shocked the market seven years ago — is that you can't completely immunize your portfolio from disasters.
You instead need to learn how to endure them.
No wonder that Wall Street is choosing to commemorate the event by ignoring it. They would much rather have to you think that a good financial adviser can sidestep financial earthquakes like Lehman Brothers' collapse.
Don't believe it.
Of the nearly 200 investment advisers whose performance is tracked by the Hulbert Financial Digest, just 5% of them made money in September 2008. So only one out of 20 can even begin to lay claim to have anticipated what was about to happen in that fateful month.
But even that's doubtful. These 5% who made money that month have, on the whole, been mediocre performers since then. This creates the strong suspicion that luck played a big role in these advisers' making money in September 2008.
| Performance in September 2008 | Performance since September 2008 (annualized) |
| Made money | 3.7% |
| Lost money | 6.9% |
| Lost even more money than Wilshire 5000's minus 9.3% | 8.3% |
Take a look at the accompanying table. The 5% of advisers who made money that month have gained 3.7% annualized since then, significantly less than those who lost money in September 2008. In fact, the best average returns over the last seven years were produced by those who didn't just lose money that month, but actually lagged the Wilshire 5000's 9.3% loss.
You still might be impressed that 5% of the advisers were able to make money even while the financial world was collapsing. But I don't know how, in advance, you could have identified these advisers.
| Return over this many years through 8/31/2008 | Average equity exposure on 8/31/2008 among market timers ahead of the market over this time horizon | Average equity exposure on 8/31/2008 among market timers lagging the market over this time horizon |
| 5 years | 65% | 33% |
| 10 years | 65% | 26% |
| 15 years | 59% | 22% |
| 20 years | 51% | 30% |
In fact, as you can see from the accompanying table, the market timers who had the best track records going into September 2008 had far higher average equity exposure levels than those with the worst records. In other words, your best bets that month would have been those with the worst track records up until that point.
Good luck with that if you seriously want to pick your advisers that way.
The proper investment lesson to draw from all this? Disasters like Lehman Brothers' collapse can occur at any time, without warning, and when they do the market will plummet. While these cataclysms fortunately are not frequent, they are nevertheless inevitable. If such drops would be intolerable to you, then you should reduce your equity exposure now to whatever your comfort level would be during such a disaster.
The worst thing to do is to wait until disaster strikes and sell into the panic that immediately ensues in its wake. As I discussed last week, that far more often than not gets you out at the worst possible prices.
Posted by: sarah_oz@yahoo.com
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