Client Letter – Q4 2002

I hope that you enjoyed the holiday season!  In order to start this year on a positive note, I thought that it might help if we look at 2002 with the proper perspective.  The chart below shows annualized investment returns for the major asset classes over three periods—one year, five years, and ten years (all of which end December 31, 2002).  While most of the equity asset classes did not perform well in 2002, the five and ten year annualized returns for most of these asset classes do not look as bad as you might expect.  In fact, the ten-year returns are very good, which means that a diversified portfolio would have done pretty well during the last ten years (even with the three-year bear market)!  Always keep in mind that the reason stocks generally earn higher returns over the long run is that you are taking more risk in the short term.  In other words, the higher returns are your compensation for taking on greater short-term risk!  And, while you might view the last few years as “bad years,” just remember that even the most recent 10-year period (which is not a very long investment time horizon) still looks pretty good from a “big picture” perspective.

Market Returns for the period ending December 31, 2002

 Asset Class 1 Year Return 5 Year Return* 10 Year Return*
U.S. Large Growth-27.89%-3.84%6.71%
U.S. Large Value-14.89%2.71%10.84%
U.S. Small-19.2%2.04%8.97%
U.S. Small Value-9.27%4.92%12.84%
Real Estate (REITs)4.17%4.65%9.05%
International Large Growth-14.6%-2.45%4.03%
International Large Value-8.51%.67%6.79%
International Small1.91%2.61%2.98%
International Small Value5.81%4.16%N.A.
Emerging Markets Large-9.43%-1.44%3.5%
Two-Year Global Bonds5.27%5.77%5.62%
Five-Year Global Bonds10.37%6.98%7.61%

*Note: Returns for periods greater than 1 year are annualized.  Positive returns are in bold.

After reviewing the past, let’s discuss what the future may look like.  Wait just a minute—can anyone really know whether stocks will outperform bonds during the next year?  Can anyone predict how the market will react to a possible war with Iraq or Korea?  Well, as you probably expected, I DO NOT believe that anyone can consistently predict what will happen in the short-term.  James Grant of Grant’s Interest Rate Observer was quoted as saying, “Nearly every day brings word of an event that, only a few short days, weeks or fiscal quarters earlier, would have seemed unthinkable.”  Tying your investment strategy to the impossible task of forecasting these “unthinkable” events is simply ridiculous.   It may be entertaining to see 50 talking heads forecast the stock market, but it isn’t helpful for developing a sound investment strategy.

Over the long term, you should expect that the world economy will continue to expand and the stock market will reflect that upward trend.  Dr. Jeremy Siegel, a Wharton School professor and author of Stocks for the Long Run, discusses his “lesson plan for investors” in the January/February 2003 issue of Worth magazine (“A New Lesson Plan for Investors, pgs. 72-75).  In this article, Dr. Siegel says that investors should “buy stocks and hold them for the long run.”  Dr. Siegel states that based on historical standards, “the stock market . . . is no longer overvalued.”  At the regional NAPFA conference in November, Dr. Siegel spoke about his research on stock prices.  When I saw his charts, which show the trends in stock prices over the last several hundred years, it became very clear that long term trends in stock prices are fairly consistent (as opposed to short-term price trends for periods under 20 years).  Dr. Siegel believes, as do I, that “a long term orientation is . . . key” to being a successful investor.

Finally, I want to take a brief moment to discuss my views on the “double taxation” of dividends.  For several years now, I have spoken passionately about this issue with clients because of its impact on corporate decision-making (not because of my political views on who should get a tax break).  In this quarterly mailing, I have included a copy of a Wall Street Journal article by Jonathan Clements that summarizes my views.  While I am absolutely in favor of eliminating the “double taxation” of dividends, I believe that giving the tax break to corporations (rather than individuals) will “encourage companies to make wiser decisions about how to finance themselves and what to do with earnings.”  Even though Bush’s “current proposal is more politically palatable,” it will not “incentivize 100% of corporations” to pay dividends.

For my asset management clients, I have included an updated glossary for the “Portfolio Performance Summary Report.”  This new glossary explains the difference between actual and annual rates of return, which are shown on the report.  Please call me if you have any questions about how to interpret your performance reports.  Also, I have included 2002 Realized Gains and Losses reports for asset management clients who have taxable investments accounts.  These reports show the net proceeds and cost basis for taxable securities that I sold during 2002.  Make sure that you give these reports to your accountants.

As always, I would encourage you to tell your friends about Keystone Financial Planning.  My website ( is a valuable resource for those who are interested in learning more about my services.  Let’s work together to make this a great year!

Chris signature

About Christopher Jones

Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.