I am reminded of a lesson ...

by Wayne Ferbert on January 19th, 2012

The lesson is short and sweet: investing is a marathon and not a sprint.

As a money manager, our team is always looking back at performance and looking forward at the market landscape. We are always trying to see what the past might tell us about the future.

At quarter end, we all spend a lot of time building performance reports to share with clients. I am reminded by this recent exercise that patience is a virtue.

The fourth quarter of 2011 was difficult on any portfolio that built its hedges in the prior quarter – especially in the August/September timeframe. Volatility really spiked in that timeframe and hedging your downside protection got much more expensive than usual.

Then came a nice run in October and steady side-ways market with a slight upward trend. The result: those hedges built in August/September lost a lot of value in a fairly short timeframe.

Hedging will always reduce performance in an upward moving market. And it will improve performance in a downward moving market. Just get used to it. But when your hedges include the expensive kind that were built in August/September, the performance drain is even more painful.

However, I am again reminded of a lesson: it is a marathon and not a sprint.

Why am I reminded of that?

In just the first 18 days of the new year, the markets have moved up nicely again – and in a very steady up-trend. I am not sure if this trend is here to stay but the move has been enough to materially move many portfolios.

In particular, we had some emerging markets and financials positions that under-performed the market in the last quarter. Now, in the first 3 weeks of the new year, these sectors and positions have out-performed and really made up for much of their under-performance for the prior quarter. Add in a concentration in mid-cap growth stocks and the first 3 weeks of the new year is off to a nice start.

My conclusion: same as I started with – It is a marathon and not a sprint. The same way that one quarter is too short a time period to judge – 3 weeks is too short of a time period to judge. Just look at how the tides turned on only 3 good weeks of performance.

Let’s not celebrate too much either. The recent out-performance in these 3 weeks might not hold up. You can’t get too up or too down in managing your portfolio. You have to make sure emotions do not upset your ‘portfolio applecart’. Just roll with it – and remember to put on your long-distance running shoes!


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