Wednesday, August 5, 2009

We Can We Get Rid of the Parentheses?

My long-time client, Diane, politely interrupted my possibly overly detailed summary of her portfolio returns with the question, “Just tell me when we will get rid of the parentheses?” Parentheses are used in our portfolio reports to separate negative portfolio results, and Diane was hoping we might be getting rid of them soon. She was referring to our trailing 1 year portfolio results, since for the year-to-date period (January 1 to the present) Pinnacle accounts are in robustly positive territory. However, the trailing 12 month returns for Pinnacle Moderate Portfolios remain about 5% in the red? (Note: See your wealth manager for performance numbers for other portfolio policies.) The good news is it appears that history is on our side.

The key to evaluating trailing 12 month returns is to realize that the starting number (12 months ago) changes every day. Unlike year-to-date returns where the January 1 price is always the same, the rolling 12 month return is just as much about what happened last year as it is about current market prices. If the stock market was declining one year ago then, all things remaining equal, 12 month performance is likely to improve as we measure from the lower prices after the decline. And guess what? We are rapidly approaching one of the biggest price declines in history, the stock market panic sell-off that followed the Lehman Brothers bankruptcy on September 17, 2008. So while the current trailing 12 month return for the S&P 500 Index is -20%, if prices were to stay the same the index would break even in terms of 12 month returns on October 7, 2009. Diane, if you own the S&P Index and the price doesn’t change between now and then; the parentheses go away on exactly that date.

The story for Pinnacle Moderate portfolios looks even better. Assuming that current prices don’t change, and considering all of the usual caveats about cash flows, fees, and different portfolio securities due to tax considerations, and considering that this is a completely unofficial, Sunday morning view of the matter, I’m guessing that Pinnacle accounts could break even as early as September 18th, the anniversary of Lehman collapse. Mark your calendars! Of course, there is the not so small matter of current prices, which most assuredly will not stay the same between now and then. Market rallies will take us to positive territory sooner, and sell-offs will postpone the date. Heck, if the stock market rallies 10% on Monday and portfolios gain 5%, we will break even by the time you read this post! All of which is my way of saying that hanging on to short-term performance numbers is best left to Chief Investment Officers with nothing better to do on a Sunday morning.