Thursday, March 11, 2010

Much ado about nothing

If we look back twelve years to the first financial industry bailout, Long Term Capital Management (LTCM), it really is quite like Disney's Magic Mountain. Full of swoops and climbs but getting out pretty much exactly where we started.

Dave Rosenberg of Gluskin Sheff makes the following points with a 30,000 ft perspective on the markets. When we look at the last 12 years, dating back to LTCM and the bailout that ensued, we have endured a 60% rally, followed by a 50% selloff, followed by a 100% rally, followed by a 60% selloff, followed by a 70% rally. Over 12 years the Dow is up about 10 percent, or less than one percent per year. But wasn't it fun to celebrate and commiserate and pontificate for the last decade?

The equity market is basically flat for a buy-and-hold investor. The really important lesson though is that this is a great case for active portfolio management, also a lesson that investors will not lose out by going long after a 50% collapse from the high; nor are they likely to feel much pain from selling into a 70% rally from the low. Chasing performance at this juncture is probably unwise.

John Barnyak