Over the next week or so, we are going to be commemorating our 15th birthday with team celebrations across our regional locations. We opened our doors as Hewins Financial Advisors, LLC on October 1, 1999 in Redwood Shores, CA, just south of the San Francisco International Airport. What a 15 years it’s been! We are enormously proud of the firm we’ve built and the work we do with clients. But the markets haven’t always made it easy.
Throughout the lifetime of our firm, we’ve experienced two bear markets, the 9/11 attacks and aftermath, the financial crisis and the Great Recession of 2007-2008 (plus the Euro crisis that followed), wars in Afghanistan and Iraq, and now back to war in Iraq and Syria as well.
1999 seemed like a propitious year to begin. The market started out strong, providing a tailwind for our clients’ assets and our business. One year in and all major equity asset classes had advanced, led by a 23% gain in small-cap stocks. Then, the dot-com bubble burst. By the time we hit our third birthday on October 1, 2002, we were looking at double-digit losses in the major equity indices on an annualized basis, with the S&P 500 down 12.9%.
However, our 15 years have also encompassed the last half of a powerful bull market for bonds, which started when interest rates peaked in 1981. While equities tumbled over that first three-year period, bonds (as measured by the Barclay’s Aggregate Index) turned in a 9.48% annualized result. Think about that — just how powerful has this bond market rally been? From the firm’s inception in 1999 to August 31, 2014 — just under 15 years — bonds have risen a cumulative 127%, more than U.S. large-cap stocks (107%) and more than international stocks (+84%).
In October 2007, the S&P 500 finally crawled back to surpass its 2000 high, just in time to experience the worst stock market crash since the Great Depression, with a 57% decline from its peak to its trough in March 2009. It has been almost all uphill from there, with the S&P 500 surpassing its 2007 high in January 2013 and hardly looking back.
These 15 years have offered up some interesting lessons from both an investment and business perspective. Just to name a few:
1. Emerging markets have been an important story of the past 15 years. At the beginning they represented about 3% of global market cap, but those markets grew to 15% of the global total in 2011 (and now about 11% after the recent decline). The 312% gain over that time is almost triple the gain of the S&P 500, as those countries experienced GDP growth well in excess of the developed world. The chart above shows the volatility that has accompanied that.
2. Diversification, diversification, diversification — the power of which was on full display over our 15 years. Remember the “Lost Decade”? The story on our 10th birthday in 2009 wasn’t nearly as rosy as it is today — the S&P 500 had a negative return. We may have experienced a lost decade for the S&P 500, but as the chart above shows, that was not the case for small-cap and emerging-markets stocks, or for bonds. Investors with broadly diversified portfolios continued to build wealth despite the flat performance of a typical large cap domestic equity-only portfolio, in contrast to popular perception.
3. “Time period” — not “timing” — is everything. Long-term expected returns are just that. Even 10- or 15-year periods can deviate from long-term expectations. Performance is end-point dependent and can look very different with just a few quarters’ change.
4. Which makes it even more important to look beyond short-term fluctuations and fight “recency bias,” the tendency to extrapolate today’s situation and recent events out to the future. It is hard to overestimate just how strong that pull was for our clients in the depths of the financial crisis. Even the most seasoned among us struggled through 2008 and early 2009, as each day seemed to bring more bad news than the day before. But the market turned around very fast, and those that stuck with their plan and resisted the impulse to capitulate saw their portfolios recover with a vengeance. Such is the nature of markets.
We have found that education — early and often — is the best antidote to getting caught up in the euphoria of bull markets and dragged down by bears. Today, we are privileged to be working with many of the clients who started with us 15 years ago and embraced that critical lesson. That should serve us both well for the next 15!