Any investor should be willing to admit 2011 was a pretty crazy year for the markets. We were churned through the year by a weather and nuclear disaster in Japan, a deadlock over finances in Congress that led to a downgrade of U.S. debt, and a major crisis in Europe that threatened to blow apart the European Union and end the Euro as a currency. The third quarter saw world markets swoon to bear market levels, only to recover swiftly in October, which turned out to be the best month for investors in 20 years. Withdrawals from mutual funds indicated that many investors fled the market altogether during the year after being pounded with headlines predicting economic disaster and even another Great Depression. Overall, the U.S. markets weathered the storm much better than international and emerging markets—the first time this has happened in a decade.
As the year winds down, financial markets are gripped by uncertainty over developments in the Eurozone crisis. While not seeking to downplay the anxiety generated by these events, particularly in relation to their effects on investment portfolios, it’s worth reflecting critically on the 20 th century, and putting current events in perspective:
- Nearly 100 years ago, Europe was engulfed by World War I. The economic effects were significant, with widespread rationing, labor shortages, and massive government borrowing.
- A little over a decade later, the Great Depression cut a swath through the global economy. In the meantime, resentment was growing in Germany over its Great War reparations to the Allied powers. Berlin resorted to printing money to pay its debts, which in turn led to hyperinflation.
- More than 50 million died in the Second World War. In economic terms, the war’s impact was profound. Most of Europe’s infrastructure was destroyed, millions of people were left homeless, labor shortages were rife, and rationing was prevalent.
- In the mid-1970s, the depreciation of the US dollar, the breakdown of the monetary system, and war in the Middle East encouraged major oil producers to quadruple oil prices. Stock markets collapsed and stagflation—a combination of rising inflation alongside rising unemployment—gripped many countries.
- In the past decade, there have been the tragedies of 9/11; the 2004 Asian tsunami; the 2011 Japanese earthquake, tsunami, and nuclear crisis; and now, the financial crisis sparked by irresponsible lending, complex derivatives, and excessive leverage.
Today, while the US and Europe are gripped by tough economic times, much of the developing world is thriving. Rising levels of education, health, and workforce participation also mean that foundations are being built for a healthier and more peaceful global economy. Anxiety over recent market developments is completely understandable, and it is quite human to feel concerned about events in Europe. But amid all the bad news, it is also clear that the world is changing in positive ways that provide plenty of cause for hope and, at the very least, gratitude for what we already have.
Yes, it is true that many investors have made next to nothing for five years running—mainly due to the 2008 bear market. But that trend is unlikely to continue. Long periods of high volatility and underperformance by the stock market have always been followed by extended periods of outperformance and lower volatility. A look back at history suggests that the odds are on the side of long-term investors who vow to weather the short-term storms.
Now, since tax time is approaching, we have included several important tax-related documents in this quarterly mailing. First, for clients who do not pay our fees from an IRA account, I have provided a report that shows the fees you paid Sparrow Wealth Management in 2011. Second, for clients with taxable losses or gains in a brokerage account, I have provided a Realized Gains and Losses report, which shows the net proceeds and cost basis for taxable securities that were sold during 2011. Make sure that you give these reports to your accountant or tax preparer. We will send these reports to your accountant if we have a signed permission form on file.
Finally, we want to thank all of our clients for your support and patience as we navigated through some major changes in 2011! Our transition from Charles Schwab to TD Ameritrade and the relocation of the firm to Las Vegas, Nevada are now complete. I will be traveling to Pennsylvania at least twice a year to meet with our East Coast clients. The firm’s new primary address is:
Sparrow Wealth Management
10080 W. Alta Drive, Suite 125
Las Vegas, NV 89145
Let’s work hard to make 2012 a very prosperous and Happy New Year!
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.