Of Warren Buffett’s many famous quotes, his rules for investing stand out:
Rule 1 – “Don’t lose money”
Rule 2 – “Never forget Rule Number 1”
Buffett’s rules nicely illustrate our philosophy – and performance. Over the past 10 years, as the stock market gyrated between big gains and losses, MCS Financial Advisors produced steady returns for our clients, leaving them 76% richer than those who invested their wealth entirely in the stock market (see Figure 1).
Figure 1. – Thanks to smarter asset allocation, MCS produced for its clients returns that were 76% higher than the S&P 500 Total Return index- with less risk.
Values assume $1 million invested on 12/31/1999. The MCS portfolio returns are dollar-weighted, net of investment management fees, include reinvestment of dividends and capital gains, and represent all fully discretionary income/growth accounts (representing 85% of MCS Financial Advisors’ assets under management as of 12/31/2009 and invested primarily in U.S. stocks and bonds). The stock index values are based on the S&P 500 Total Return Index, which measures the large-capitalization U.S. equity market. The bond index values are based on the Barclays Capital U.S. Aggregate Bond Index, which measures the U.S. investment-grade bond market. Index values are for comparison purposes only. The report is for information purposes only and does not consider the specific investment objective, financial situation, or particular needs of any recipient, nor is it to be construed as an offer to sell or solicit investment management or any other services. Past performance is not indicative of future results.
The importance of not losing money is often obscured by the media’s obsession over short-term measures of investment performance (“Stocks Post Biggest Rebound in 2009 since Great Depression”1). Intuitively, it is easy to think, “Well, the S&P 500 index was down 37% in 2008, but it rebounded 26.46% in 2009 – we’re down only 10%. That’s not too much to make up.”
Unfortunately, investment compounding does not work that way, and that is precisely Buffett’s point.
As you can see in (Figure 2), the 2008 37% drop in a $1 million portfolio invested entirely in the S&P index leaves a $630,000 balance. The 2009 increase is relative to this lower balance, so the 26.46% gain on $630,000 does not get the portfolio back to within 10% of its starting point. By the end of 2009, the hypothetical $1 million portfolio is actually worth $796,698 – a 20% loss from its starting point on January 1, 2008.
Stock market recovery? The outcome of $1 million invested at the beginning of 2008 and held through 2009. The loss of 37% in 2008 reduces the account balance to $630,000. The rebound of almost 26% in 2009 does not result in an overall loss of only 11%. The actual loss for the two-year period is over 20%. (The S&P 500 Total Return Index measures the large-capitalization U.S. equity market.)
Just as important as the better performance is the consistency of our investment returns. That consistency is a product of our investment philosophy and the mission that drives everything we do: Transform money from a source of worry to a resource for fulfillment.
Our mission is not just a slogan. To succeed at transforming money from a source of worry to a resource for fulfillment, your money must be there when you need it. Reducing risk, while at the same time achieving reasonable returns, allows our clients to feel more confident in the sustainability of their wealth and the feasibility of their retirement, estate, or charitable gift planning.
Many people feel burned by the events of the past two years. The numbers show that clients of MCS Financial Advisors had little to worry about and continued to enjoy consistent income through the downturn. This performance by the numbers – and more important, the peace of mind it provides clients – is a function of our unique approach to investment and risk management.
MCS Financial Advisors is currently accepting new clients. Historically, most of our new clients come as referrals, as our clients introduce us to friends and family members who have struggled to find trustworthy investment advice. We appreciate these introductions, and we are glad to explore whether our asset management and financial planning philosophy would be a fit for those whom you would like to help.
To our newsletter recipients: We offer a free portfolio review and one-hour consultation – a time to get to know each other and determine whether our philosophy fits your needs. Feel free to call anytime for more information or to set up an appointment.