There is this myth that is being spread by the media, fund managers and other wall street experts that somehow the last decade was LOST. I was even on Fox 35 last week in reference to a new research study that was published which examined the fact that investors were shying away from stocks.
However, I want us to take a closer look at the decade and put it into its proper perspective. At the end it will show that the decade was far from LOST.
Now, there is no question that 2000-2009 had lots of peaks and valleys for investors. But this is not at all uncommon in the world of investing, especially with stocks in your portfolio. But lets understand that index returns are not market returns nor investor returns. For starters, when the media refers to the market they most often refer to the Nasdaq, Dow or The S&P 500.
But the reality is that none of these indices actually measures the true market or investor returns for THREE REASONS:
First, indexes measure only the portion of returns that come from stock appreciation— They ignore dividends paid from the stocks inside the index. This may not sound like a lot…but compounded dividend gains amounted to more than half of the total returns over the long term for investors.
Secondly, these indices leave out a lot of stock. The DOW is represents only 30 stocks, the NASDAQ is only 20% of the US Market, and even the S&P is only 500 stocks which ignores the 1000’s of small and microcap companies that are important for diversification and return. In addition, non of these indexes take into account any foreign stocks.
Thirdly, you likely didn’t place all of your money solely in the U.S. stock market. We would consider such a move to be NOT SMART to be politically correct. Instead, our clients own a globally broad portfolio contained foreign stocks, bonds, CDs, real estate and natural resources such as oil and gold, in addition to U.S. stocks.
Such diversification proved its worth, as gains in some asset classes were able to offset losses in others.
Now let me tell you what worked best this past decade:
Asset Allocation (diversification among asset classes) which of course we always talked about before.
Rebalancing (which means getting the portfolio back to its intended allocation).
But let me tell you what was really the winning formula. For those who continued to save money whether in a 401k at work, IRA, or other accounts and invested in a globally diversified prudent portfolio you exploited a concept known as dollar cost averaging, a strategy that enables you to improve long-term returns by continually buying shares during temporary market declines. Thus, it’s likely the value of your accounts was higher by the end of the decade, despite the fact that the stock market itself remains much lower.
Fidelity Investments, one of the largest sponsors of 401(k) plans in the country, analyzed the accounts of 11 million 401(k) participants over the past 10 years.
The result: Those who were invested in their 401(k)s in 1999 and continued to invest throughout the next 10 years had account balances nearly 150% higher than they were in 1999. This was the result of continuous saving by participants and employer matches.
So what do we learn from this: well even though generous returns were there for the taking, few investors actually got them due to:
1.Bad behavior. Herd mentality and panic sellers. In other words BEING HUMAN
2.Using active management of portfolios and incurring high cost from professionals thinking they can outsmart the market.
So what do you need to do for the next decade or even next 100 years.
1.Understand that the markets are a tool and still to this day is one the best wealth creation tools ever.
2.Stay invested and control your emotions. Let market forces work and don’t fight them. Generous returns are their for the taking. Just be patient.
3.Have a plan and stop falling for gimmicks. There is really no magic to this. The financial industry wants to constantly keep you confused. You don’t have to be when you hire a coach.
And last but not least.
4. Understand that no one knows were the next 20% movement in the markets will be, but the next 100% movement will be up. The markets have seen many declines all followed by recoveries. The markets have also seen many 100% increases. But has never suffered a 100% loss. So remember that anything short of a global catastrophe such as a nuclear attack, meteor shower, or earth swallowed by the sun it will be rare that the markets will see a 100% decline and if this indeed happens then really your portfolio should be the least of your concerns. Not even gold will help you.
This shows that it is possible to create and grow your wealth — no matter what’s happening in the economy. And, no matter what, you need to keep investing for your future.
If you are looking for a brief, plain-English introdution to investing, don’t forget to BUY my book, Dirty Filthy Lies My Broker Taught Me & 101 Truths to Money and Investing. Order my book now and I will also send you my Investor Awareness Guide and listen to our The Seven Deadly Investor Traps that Destroy Your Wealth and the Three Power Strategies to Fix Your Portfolio Fast! These materials will equip you with the information you need to begin putting your investment experience back on track.
Notes and Disclosures
* An Index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
Dollar Cost Averaging does not assure a profit or protect against a loss in a declining market. For the strategy to be effective, you must continue to purchase shares in both up and down markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low price levels.
Allan Roth, Why It Wasn’t a Lost Decade for Investors. 12/18/2009. Allan is a great columnist and always has wonderful insight for investors.
DFA Returns Software, 2010. This software was used to run the asset class returns and the Lost Decade portfolio. The Lost Decade Portfolio comprised of the following asset class allocation: Aggregate Bond-20%; MSCI Emerging Mkts-6%; Dow Jones Large Cap Value-6%; MSCI EAFE Index-6%; S&P 500 Index-6%; CRSP 9-10-6%; MSCI EAFE Value Index-6%; Dimensional Intl Small Cap Index-6%; Russell 2000 Index-6%; Russell 2000 Value Index-6%; Barcap Global Aggregate Bond Index-20%; Dimensional International Small Cap Value Index-6%.
Adam Shell, Will Stocks LOST DECADE Usher In Another Bull Market?
LaWain McNeil with Efficient Advisors
Mark Matson with Matson Money.
Wealth and Business Planning Group, LLC (The Financial Quarterback™) is a Registered Investment Advisor in the State of Florida that provides Fee Planning and Asset Management. Depending on your state of residence, Wealth and Business Planning Group, LLC (The Financial Quarterback™) may not be able to immediately provide services. For more information go to www.thefinancialqb.com.