January 2000 Newsletter

Investment Returns

The preliminary 1999 numbers are coming in for various stock markets. Here is a sampling. [Note: the international markets are reported in U.S. dollar numbers; local currency returns are significantly higher.]

U.S. S&P 500 19.80%
U.S. 9-10 Small Co. 24.80%
Canada 42.90% South Africa 64.40%
Mexico 91.00% Thailand 39.50%
Venezuela -12.60% Malaysia 42.30%
Chile 32.90% Singapore 56.20%
Brazil 50.90% Indonesia 77.30%
Japan 67.30%
Belgium -17.30% South Korea 110.60%
France 32.20% Taiwan 42.30%
Great Britain 14.30% Hong Kong 73.20%
Germany 20.90%
Greece 39.30% Australia 20.50%
Norway 33.30%
Sweden 70.70%
Finland 153.10%

As you can see, the U.S. stock market was not the best performer in the world's equity markets, but many investors are still asking for an all-U.S. portfolio from their advisors. Why? It's a frame of reference issue.

According to Roger Gibson, author of Asset Allocation: Balancing Financial Risk, frame of reference risk is the risk of a person's investment experience being different from what they see going on around them. Following a well- articulated, disciplined, successful strategy for clients is not enough if they don't have the frame of reference to understand that it's the appropriate strategy for them. Investors are going to look at their investment results and experience them as either good or bad in comparison to some backdrop, or frame of reference.

For investors in the U.S., that tends to be what they hear on the evening news. When the business report comes up, they'll hear about what the Dow Jones Industrial Average did that day — they aren't necessarily going to hear what's going on with a globally diversified portfolio.

You get the risk-adjusted advantages of a multiple asset class approach only if you're willing to accept a pattern of returns that's different from what you hear on the evening news, and the pain of being different from your friends. That's frame of reference risk.

Dalbar Study Update

Those of you who have attended our in-house investment presentations may remember the Dalbar study on mutual fund investor returns. Dalbar recently announced the results of their update, which covers the 15 years ending in December 1998.

The study found that the average stock mutual fund investor earned just 7.25% in that time, compared to a "buy and hold" result of 17.9%. The president of Dalbar said the difference in returns can be attributed largely to irrational behavior on the part of investors, with attempts to time the markets, frequent trades and panic selling during down markets.

The average 1998 stock mutual fund investor held his funds for only three years, slightly up from the 15 year average of 2.8 years. Dalbar attributed the slight improvement in retention to efforts by the financial services industry to educate investors.

Charles Schwab Web Site

Charles Schwab has launched a new web site and phone service for the clients of financial advisors like Silver Oak. The address is "www.schwaballiance.com" and the phone number is 1-800-515-2157. Investors can gain access to all of their accounts held at Schwab to monitor positions, check balances, obtain transaction histories, arrange money transfers and set up a bill paying system.

Schwab also recently increased its customer account protection from $100 million to the full net equity value of an account. This is one of the highest levels of protection in the brokerage industry. The coverage is on top of the Securities Investor Protection Corporation (SIPC) insurance of up to $500,000 per investor account. Of course, such insurance protection does not cover investors for fluctuations in the market value of their securities.

Bull Market Run

Measured by the Dow Jones Industrial Average, October 11, 1999 marked the ninth anniversary of a powerful bull market in U.S. stocks. After slumping to 2,365.10 on October 11, 1990, the Dow soared 350% over the subsequent nine years, closing on October 11, 1999 at 10,648.18. Using a 15% decline from the previous high as a definition of "bear market," the current upswing has lasted over 108 months. The previous record, long since eclipsed, was 82 months for the period June 1949 through April 1956, when prices advanced 222%. The persistence of the 1990s bull market has flummoxed a small army of market forecasters. A sample of their opinions are as follows:

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