Ten Years Later—Lessons From a Market Collapse (and Recovery)

Dan Wiener: Hello. This is Dan Wiener, chairman of Adviser Investments with another “Adviser You Can Talk To” podcast. This time I’m talking with Jeff DeMaso, Adviser Investments’ director of research. And, Jeff, let’s get right into it. This Saturday is going to mark the ten-year anniversary of Lehman Brothers bankruptcy, which a lot of people consider the beginning of the massive bear market and great recession that, that we experienced in 2008, 2009. There are a few things we want to talk about but let’s go right to it. What lessons do you think you’ve learned as an investor over the last decade?

Jeff DeMaso: You know, I think the lesson that I have learned has really been reinforced, is just the power of spending time in the markets. It was incredibly painful in the credit crisis, Great recession, going through that drawdown. And I think as investors, we’re still probably collectively dealing with some of that psychological impact. But if you took an investor who invested in October 2007, so at the market peak before everything started to unravel, today they’re up 133%.

Dan Wiener: So they more than doubled their money.

Jeff DeMaso: More than doubled their money, 8% a year annualized return, and that’s including the pain of the great recession. So that’s not bad. And it shows that, while it takes time, that time can really help heal some of the damage that we see in portfolio values.

Dan Wiener: There’s another lesson, I think, that people who have disposable income or are still in the accumulation phase should recognize, and that is that if you were smart enough, lucky enough, or just blind enough to have continued putting money into the market as it was going down in 2008, you came out smelling like a rose. I mean, some of that money is up 200%, 300%, 400%.

Jeff DeMaso: Oh, yeah. That’s why we like putting your investment plan on autopilot. So 401(k)s are a good example. That money automatically comes out of your paycheck every two weeks, every month, whatever it is at your company. And it gets automatically invested in the market, without you having to make any additional decisions. We think that’s really powerful.

Dan Wiener: Which leads to an issue that, that I’ve been talking about for a while now with you, and that is that fact that, you know, when the market was doing terribly and the numbers were awful, investors looked askance. They are, I’ve called it the siren song of double-digit returns. We’re in a period now where returns from the market have been exceptional. And I think, you know, there’s probably a cautionary tale here, don’t you think?

Jeff DeMaso: I do. I do. To put some, some numbers on it, you know, that double digits what you’re talking about. If you look at the S&P 500 over the past one year, three year, five year and ten year, so these kind of standard performance look-back periods that everyone focuses on, the S&P is up double digits in each case. I mean, the ten-year number’s up 11% annually. So those are some nice returns. So I do think investors are at risk of looking at those numbers and extrapolating them forward ad infinitum into the future.

Dan Wiener: Yeah. We have a problem that as investors a lot of us psychologically have something called regency bias, right? We look at what’s happened most recently and we project into the future that that’s what’s going to happen, you know, over the next year, five years, ten years. I was looking at those S&P numbers and yeah, the one-year return for the S&P as of last night was 17%. Three-year return, 17% annualized. Five-year return, 14% compounded. Those are, those are very big numbers. And yet, when you look overall at the total return, the average of all those one-year and three-year and five-year and ten year periods, it’s more like 8 to 8 1/2%. So the current numbers are 2x.

Jeff DeMaso: Oh, yeah. They’re going to, they’re going to get even worse, too, going forward. Particularly like

Dan Wiener: Or better.

Jeff DeMaso: Well, well, yeah (laughs). Bigger. You’re going to be more at risk for feeling that regency bias. It’s going to be harder to resist that. But then, look at the ten-year number. What matters is not just the months that we add but the months that, kind of roll off the back of it. So if you go back to 2008, 2009. The S&P fell 9% in September 2008. 17% in October. 7% in November. 8% in January, 11% in February. These are some big declines that are going to roll off. So if you just look at the S&P from where it is today and measure since the market bottom in March 2009, we’re up 19% annually. We’ve compounded at 19% a year. I mean, my rule of thumb is if you can compound at 20% a year over your lifetime that puts you in the pantheon of great investors right alongside Warren Buffett. So if you’re looking at the S&P and you think, “Oh, I’m going to get 19% a year for the rest of my life,” you probably want to check that expectation at the door.

Dan Wiener: Well, a 20% return is going to double your money in a little over three years. I mean, that’s, that’s, that would be a remarkable return. The end of the quarter is coming up. What’s the caution here for investors? I mean, we’ve talked about these double-digit numbers. I did a quick calculation. The S&P would have to drop something on the order of about 18% from today for there not to be double-digit returns across all the categories. That’s probably not going to happen without some major exogenous event that, by definition, we don’t know the source of. What’s an investor to do?

Jeff DeMaso: Well, I’m going to actually push this back on you a little bit. I mean, part of my answer is going to be, you know, you need to have a plan. You need to be able to stick with it. But if we’re saying, “Hey, the past return numbers are going to look really big,” are we almost saying that we need to have that correction or that crash? And do you think someone should do differently if that’s what they’re expecting?

Dan Wiener: Right. So as, as an asset manager, as a wealth manager, as someone who, who deals with strategy around investing, I think the important thing is to say, “Look. We have had an extraordinary period that we’ve invested in.” But it- you need to, every investor has to look inside themselves and say, “Am I positioned for my objectives?” It’s not about the numbers. It’s really about meeting your objective. The numbers are irrelevant. I need to be able to meet whatever my objective is, whether it’s sending a kid to college, paying for my retirement, buying a house, any of those things.

So really, the reflection should be not on, “Am I going to make 20% a year or am I going to make 8% a year?” It’s, “Am I positioned in a way that hopefully gets me to the end result I’m looking for?” And, you know, clearly a lot of people can’t do that on their own.

They need help from financial advisers, you know, putting in a plug here for Adviser Investments. But, you know, really a lot of people, as I said, can’t do this themselves. And they need someone to give them a dispassionate analysis. And, and that’s really, I think, the big lesson from here is that the S&P at its worst has generated a 48% decline over a one-year period. But it’s also, at its best, generated a 72% gain. So, the variability is huge. But if you’re a long-term investor, you shouldn’t be too worried about that.

Jeff DeMaso: Yeah. I mean, it’s, sometimes comes across as a little self-serving but we always try and coach people away from fixating on the S&P or the Dow or whatever number’s always in the media. Because you’re right. Nowhere does it say to meet your goal of sending a kid to college or planning for retirement that you need to beat this arbitrary benchmark of the S&P 500, whatever it may be. But we do think that what investors need to focus on is their objective.

Dan Wiener: So what are you going to do on Saturday to celebrate the ten-year Lehman Brothers bankruptcy?

Jeff DeMaso: Well, Saturday, I’ll be exploring Portugal with my wife (laughs).

Dan Wiener: Excellent idea. Great way to spend a ten-year anniversary. And with that I’m going to thank Jeff DeMaso, our director of research, for spending a little time with me talking about these numbers. This is Dan Wiener, chairman of Adviser Investments. Thank you for taking time today to listen to another one of our “Adviser You Can Talk To” podcasts.