The past few months have been tough on investors who have seen the value of their stock portfolios — including 401(k) retirement plans — erode as energy prices soared and the housing market soured.
Greg Boll, left, and Chris Hasircoglu explain their investment techniques
during an interview at Lanc
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S&P growling (PDF graphic)
But every downturn has its opportunities, according to managers at a couple of Lancaster investment firms.
"Low [stock] prices are bad if you're a seller. They're welcome if you're a buyer," said Tim Decker, president of ISI Financial Group, 26A E. Roseville Road.
Decker said he prepares his clients for bear markets with what he calls financial fire drills and so far this time around he's had to calm the nerves of only one of them.
Chris Hasircoglu, senior partner at Lancaster County Financial Group, 160 North Pointe Blvd., said some of his clients "have their concerns, and rightly so," and he's even had one who was thinking, "this is the beginning of the end."
But Hasircoglu believes the things he and partner Greg Boll learned during the last bear market in 2000-2002 have helped them better prepare their clients for this one.
"The conversations I'm having with my clients this go-around are much better than the last go-around," he said.
Part of that Hasircoglu attributes to the computer programs he and Boll began using five years ago to aggressively manage a portion of their clients' investments.
Some of the portfolios in their "dynamic asset allocation system" made money in the second quarter this year while the overall market was falling, they said.
Historical perspectiveBear markets on Wall Street run in cycles, usually about every five years, Decker said.
Most people know that, he said, but "the temptation is to believe this time is different."
It's like a movie you've seen before and know how it ends, he explained, but your emotions get caught up in the drama and you lose sight of the ending.
"If you go back to 1960, we've had 10 bear markets," Decker said, noting that the technical definition of a bear market is a decline of 20 percent or more.
"The average loss has been about 30 percent using the Dow Jones as a benchmark," he said.
The worst during that period, he added, was in 1973, when the loss was about 45.1 percent.
Over the long haul, stocks increase in value faster than the rate of inflation. Averaged out since 1925, the S&P 500 index has increased in value 10.4 percent a year, Hasircoglu said.
But there are large fluctuations in the cycles.
In a 13-year period between 1969 and 1982, the market's total growth was only 5.6 percent, even with reinvested dividends, Decker said. But during the 18 years that followed, the average return was 18.5 percent a year.
That long run-up to 2000 included the savings and loan banking crisis of the late 1980s, which some people believe offers parallels to the current mortgage banking crisis.
"But if you go back and look at that," Decker said, "literally hundreds of banks were going under" compared with just five that have failed recently.
Compared with that period, Decker said, the current underlying economy is still plugging along without even one quarter with a declining gross domestic product, let alone the two negative quarters that would push the economy into a recession.
Decker, whose company manages $167 million in client investments with a minimum stake of $500,000 per client, uses some of those earlier bear markets in his financial fire drills.
"What we do, and what I suggest other people do, is write a specific financial plan," he said.
That plan should include enough money outside the stock market to carry the investor through a bear market without having to sell any stocks short.
When investors hold onto their investments for at least five years, "80 percent of the time, they will end up with gains," Decker said.
The fire drill consists of looking back to see how a client's financial plan would have held up during previous bear markets.
"We really challenge people to be honest with themselves," Decker said. "We ask them, 'When this happens again, are you going to be able to live with it?' "
He also said he advises people not to speculate in individual stocks but to invest "in a beautiful portfolio of index funds."
"I tell people all the time, 'Don't fall in love with something that can't love you back,' " Decker said.
Aggressive approachHasircoglu and Boll pursue similar strategies with about half of the $40 million in client assets they manage at Lancaster County Financial Group.
But for nearly five years now, they have also offered clients a more aggressive approach in which they move investments between different sectors of the market, taking their cues from an array of computer programs monitoring the sectors' performance.
Boll moves the money. Hasircoglu does most of the communicating with clients.
In all, they have 11 of these portfolios with varying degrees of aggressiveness — and risk — in their dynamic asset allocation system.
"We're not saying that people shouldn't buy and hold," Boll said.
It's just that he and Hasircoglu believe the buy-and-hold approach hasn't worked as well during the past few years as it did during the long run-up in the market during the 1980s and '90s.
One of the clients who has a number of investments with their firm, including money in some of the aggressively managed portfolios, is Dave Husser.
"They've been outperforming the market 3 or 4 percent pretty consistently," Husser said.
The most aggressive of the portfolios, though slipping during the downturn last winter, still beat Standard & Poor's 500 by nearly 5 percentage points during that time, according to a chart generated by Albridge Solutions, an independent data service.
That portfolio has had an annualized return of 18.13 percent since August 2003, beating the S&P by 16 percentage points.
The software Hasircoglu and Boll use in managing their portfolios was developed by an investment adviser in Akron, Ohio, who had been doing a good job weathering previous bear markets, Boll said.
That adviser's firm has now licensed the technology to a couple of dozen other investment firms, including Lancaster County Financial Group.
Boll likens the software to an engineer who looks for cracks in a dam before the dam has burst.
"The models look for trends before there are trends," he said.
Based on those models, Boll bought into energy funds a year ago, when crude oil was still $70 a barrel, and then again in January after it had climbed to $100 and other investors had started leaving the sector.
A couple of weeks ago, when oil was in the $140 range, the models started pointing in the other direction.
Every financial sector goes through cycles, Hasircoglu said, and the computer models help Boll buy as the momentum starts up and sell as it starts back down.
Despite the system's potential for producing strong returns, it's not foolproof. High risks accompany the potential for high returns.
Hasircoglu said he's had "one or two" of his clients "fire him" when a portfolio they invested in didn't perform well during the next few quarters.
It's also expensive because of the amount of time Boll invests in managing the portfolios and making trades. And there is a $100,000 minimum.
Clients aren't charged commissions or transaction fees for the aggressively managed portfolios, Hasircoglu said, but they are charged 2 percent of their accounts' value.
How bad, how long?Hasircoglu, Boll and Decker are all cautious about predicting how long the current bear market will last, but they agree that it's an excellent time to buy while stock prices are low.
"We do have a crystal ball," Hasircoglu joked, pointing to a glass sphere decorating a shelf in his firm's conference room. "It's the one piece of hardware we have that doesn't work."
The stock market usually anticipates the overall economy by about nine months, Hasircoglu said, so he expects the economy to continue its slump for the next few months.
"I'd say we're scraping along the bottom right now, but it could go deeper," he said.
Husser, his client, said he believes there will be a few rough months ahead, but he also said he thinks reports about current economic woes are overblown.
"I have to agree with Phil Gramm," Sen. John McCain's former economic adviser, Husser said. "We're putting ourselves in a mental recession. ... We're focusing on the negative, and all we're doing is making it hard to do business."
Ron Regar, another of Hasircoglu's clients, is more fearful of the stock market's prospects.
"In all honesty, I expect it to go much further down," he said. "I'm of the opinion that we're headed for a depression. ... It just scares the heck out of me."
ISI's Decker said he has "no clue" how long this bear market might last.
"The only people who know that are people who want to sell magazines or newsletters," he said.
But Decker did say that, using history as a guide, most bear markets last from nine to 13 months and have already run about two-thirds of their course by the time they reach the defining 20 percent drop.
From a selfish point of view, he added, the longer the bear market lasts, the more opportunity he and his clients have to step up to the plate and take advantage of the low prices.
"The only thing worse than being in the market in a temporary decline," Decker said, "is still being on the bench as the train leaves the station."
Dennis Larison is editor of the business section and can be reached by telephone at 291-8753 or by e-mail at dlarison@lnpnews.com.
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