Subject: Growth Portfolio down 4% on Tuesday! Hello Jim, I was wondering why we didn’t see an alert from you last week when Dow tumbled 3% on Thursday. I was also hoping to see an alert from you about yesterday (Tuesday). On Tuesday the Dow was down about 2.6% but the Growth Portfolio was down a panic-inducing 4%! That was the first time since I bought into the Growth Portfolio that I saw four of the funds take a greater than a 5% loss (and three of those took over a 6% loss)! I have been “staying the course” up until now but at what point should I take the panic seriously? RM
JIM: Ron, the best answer is that when you feel you should panic the most you should probably begin buying more. Hardly easy to do, but for long-term investors (i.e., those of us with a minimum of 5 to 10 years, but I’d even lump into that category the borderline of 3-years’ time), these are the types of markets that serve as the foundation of the next level of wealth building (even though the increasingly look and feel like wealth razing environments). Regarding the Special Hotlines, when a 3% move fall on a Thursday we haven’t ever done one – assuming that the view in the morning hasn’t been fundamentally swayed by day’s end. That said, it could very well be the case that an event does impact a line of thought so dramatically as to derail it by day’s end; tomorrow is 9/11 and that serves as a sobering reminder that no day should be assumed to be a simple one from start to finish. That doesn’t mean we don’t dust ourselves off and keep going to ensure better days to come – we do!
Subject: Re: Fidelity Investor Special Hotline – September 17, 2008 Your analysis completely ignores the fact that the present financial crisis was precipitated by the 1999 repeal of the Glass-Steagall act which prohibited commercial banks from selling stocks, selling insurance and engaging in investment banking services as well as prohibited insurance companies from engaging in commercial and investment banking services. That earlier system worked extremely well for over five decades. However, then-Senator Phil Gramm triumphed, through a Republican congress and a weak-kneed President Clinton advised by Robert Rubin (formerly of Goldman Sachs) in longtime efforts to “deregulate” the financial system so that greedy Wall Street types could make big money. Now we have a situation closely akin to the beginnings of the Great Depression. If only we hadn’t deregulated this particular crisis could not have materialized. WC
JIM: I take your point of view; I’d even moderate its political bent. I guess you could say that Larry Summers, Rubin and Clinton, etc. were all weak-kneed (a poor pun for Clinton if there ever was one), but I’d find it too abstract to believe that even if you discounted their roles as architects and signatories of the plan, that Phil Gramm and his cohorts could be ingenious enough to both devise the plan and execute it all on their own. But it doesn’t matter; I do agree that it was a crucial linchpin that, once pulled, made it harder to control the overall financial ship, leading to our current rudderless times. Another instance of politicians muddying the waters! Hang in there!
Subject: Safety of Cash Reserves Dear Jim, Thank you for your timely Hotline transmissions. They’ve been very helpful. Considering the current meltdown in our cherished financial institutions, exactly how safe is our money in Fidelity’s Cash Reserves (FDRXX)? Is it time to withdraw some of it and place it in a number of $100,000-insured FDIC accounts in major banks? GM
JIM: Great question – in sum, I’m not worried but watchful of what was once unthinkable and now can’t be ruled out absolutely. Nevertheless, with the Fed and the Treasury having guaranteed money market funds similar to money market accounts, the point may be moot – if not, Fidelity’s in a unique position to ride out even a depression era run on every money market fund since its overall business is so well diversified and profitable. This was decidedly not the case with The Reserve’s Primary fund (which broke the buck last week) – they had no recourse to shore up their own investment mistakes. So, all in all, I think you can rest easy, even as I stay en guard.
Subject: No Comment? I have followed your advice for years and am still on board. However, I find it somewhat disconcerting that, although you do respond when the Dow changes by 3%, there is no response when my portfolio (based entirely on your recommendations) tanks by almost 4% in one day (note: I have not even mentioned the last 2 weeks). Just at little hint/nudge at something very real that we out here are feeling. RT
JIM: Understood! I was tossing and turning last night; perhaps the sign of a market bottom. No doubt, the markets have been hemming and hawing and we have seen our portfolios’ mid-year advantage sacrificed on the altar of massive selling in the international and commodity-based arenas. The markets are trading as if the global economy has come off the rails, and as if the US consumer has gone under – neither is the case, nor is likely to be the case even inside this year, but certainly not over the next 3 to 5 to 10 years where we cast our lines. (Moreover, the volatile momentum behind the trades is increasingly more likely to be seen to be hedge fund liquidations as opposed to reasoned selling; the holdings in Leveraged Company Stock and Independence, for example, aren’t ideas akin to the tech bubble and its bursting; they’re real companies, with real goods and services, with real market share and consumers.) That said, funds that have served us best in the recent past are the very funds that have taken the biggest drubbing; setting up the stage for either doubling down or moving on.
Subject: Global Growth Model I am writing with regard to the Global Growth Model. The risk profile of the model, as per the newsletter, suggests somewhere between the Aggressive Growth and the Growth Model. However, as I recall, Hulbert mid year report lists the risk of the portfolio at 1.32 of the market. Clearly, its performance has been reflective more of the latter profile, not the former. I am concerned by the current 27 + % loss. Moreover, given your projection of a further10-15% loss in the general market that will reflect itself in a greater loss of the Global Growth Model. One could reckon oneself with a 40% loss. Clearly, the math at that point to “break-even” is formidable. Understandably, the model is a quantitative model. Nevertheless, the prudence of mirroring a degree of cash position as in the Aggressive Growth and Growth Models would have had merit in the current environment. I am following the Global Growth Model in my retirement accounts and my concern rests in the degree of the actual model risk (1.32) vs. what has been stated in the newsletter. Reckoning with a possible 40% and the subsequent math involved in recovery is not what was reflected in the newsletters profile of the model. Additionally, jumping fence to the Aggressive or Growth model at this point in time, will only cause greater recovery time to break even status. Also, it is too late for the model to revert into a cash position similar to the AG and Growth models. In short, ten cake has been baked. My question then becomes, given the disconnect between reality and perceived risk profile, how do you intend to make up lost ground? In closing, Jim, this is written not with finger pointing, rather, using a fishing analogy, the boat is in the water and the lures are not working and the seas are rough…what’s next? Thank you for your kind reply. RL
JIM: Rich, excellent questions and your concerns are duly noted and understood. Our quantitative model, by virtue of its long-only, fully invested equity portfolio, and by virtue of its global orientation will inevitably be the portfolio that suffers the most during a downturn (vs. a domestic market benchmark), but this short-term weakness is addressed by its rules based strengths which seek to ensure that it should be the one that leads during any sustained upsurge. It will also always most likely be the most volatile in a downturn when compared to our other fundamentally driven portfolios since they can (and have) been building defensive positions beyond this portfolio’s pale (cash and bonds) along this year’s declining paths. While this news may be potentially comforting from a risk tolerance perspective, it’s not likely to be all that consequential when couched in investment objective terms: for investors with a 10 year time horizon, I continue to think global growth is the right trajectory so long as you can ride through the rough patches. And while I can’t give individual investment advice in this format, I can say (and have said) that Global Growth is best deployed as a complement to one or more of our fundamentally driven portfolios to better manage the risk side of a down market’s equation and ensure that you’re still well positioned for the upside which usually gallops ahead of our asset allocation models when the capital appreciation is the rule. Another angle: an investor could also hold a similar percentage in the cash and bond funds in our Growth portfolio, for example and create his or her own risk buffer for this quantitative portfolio.