Good Bye 2008
Are you thinking my title is a big typo? That I meant to say Good Bye 2018?
It isn’t a typo, I do mean 2008.
Why are we saying Good Bye to 2008 ?
Not because it was one of the worst years for stock market returns. Not because of the housing crisis. Not because of the bailout of AIG or the end of financial institutions like Bear Stearns and Lehman Brothers.
We are saying Good Bye to 2008 because the stock market performance of 2008 has disappeared. In 2008 the S&P 500 lost 37%. It took 4 years to recoup losses in the market.
The more important reason, and the purpose of this article is that in 2019 the 10-year performance track record of a manager no longer includes 2008. It is as if your record has been expunged.
That ship carrying a year of horrible performance is disappearing over the horizon.
You might be cheering this news and I am sure equity managers are cheering with you.
When a year that was negative 37% or more, is eliminated from the track record of an investment manager I’m guessing more than a few managers are glad to see that ship sail.
One of the challenges for investors is how to sort through hundreds of funds that at first glance look the same.
When you are faced with multiple choices for investing in a fund, you need easy ways to eliminate some of the candidates.
Seeing 2008 slip away creates a different issue for investors.
Funds that have an inception date beginning in 2009 have not had to navigate through a financial crisis. In an “up” market where the performance of stocks has one great year after another, we all look like brilliant investors.
Everyone benefits in an up market. An investment manager would have to make some big wrong way bets to lose money over the last 10 years.
A reason to remember 2008 is that we want to understand how well a manager performs in what is called a “down” market. The performance of a manager in a down market tells you something about how well a manager can protect your assets when prices are falling.
2018 was a down market. The S&P was down 4.43% ( including dividends).
The question to ask is: how well did my manager do relative to the stock market in 2008 and in 2018?
If you are looking for a stock fund to invest in, you can eliminate many funds based on the “inception date.” The inception date is the date that the funds performance track record begins.
You may think that a stock funds’ performance looks brilliant on a 5-year basis.
Given the financial impact of the losses in 2008, a 5-year performance record today means that the manager started their fund in 2014.
I would say that a 5-year track record today is irrelevant because the years prior to 2014 produced incredible returns:
2009: 26.46%
2010: 15.06%
2012: 16.00%
2013: 32.39%
Basically, a manager with a 5-year performance history missed the market.
Another way to say this is that they were a little late to the party.
When prices are going down, like they did in 2008 AND 2018 the objective for any investment manager is to limit losses.
What you want to do if you are looking for a stock fund that replicates the S&P 500 is to look at funds that meet some basic parameters.
Parameters are the same as filters that you can apply to a search.
Searching and applying filters can be done on the website of your brokerage firm.
What filters should you use? I would start with the following:
- Select the asset class. Stocks.
- Select the category of stocks. For the S&P 500 use Large Capitalization (Large Cap).
- Performance benchmark. The S&P 500.
- Performance track record. Greater than 10 years.
- If it is a star system, 4 stars or better.
You might be surprised to see that there is not a big universe of managers with these basic parameters.
Before we say Good Bye to 2008, we need to remember the reason to include the performance of 2008 . When looking for a stock fund to invest in, we want to see how well a manager did protecting your assets during a financial crisis.
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
