-Carl Richards, New York Times
Thursday, April 29, 2010
Wednesday, April 7, 2010
The "Lost Decade of Investing" - Bah!
By now you’ve probably seen an article or heard a news story touting that the past 10 years (2000-2009) was a “lost decade” for stocks. As measured by the media, everyone lost money, and as proof they site the fact that the S&P 500 lost 9.1% from Jan. 1, 2000-Dec. 31, 2009. While this statistic is indeed true, it’s an isolated view.
The S&P 500 is an index composed of 500 of the most widely held (and typically largest) companies in the U.S. While 500 companies may sound like a lot and may seem well-diversified, it’s actually a narrow slice of the universe of companies available for our investment dollars.
At ICM, our portfolios consist of at least six asset classes – not just one (see note below). The portfolios that we are all invested in at ICM contain a piece of more than 10,000 companies. The very smallest companies up to the very largest conglomerates are included in our portfolios. These companies are located in over 40 countries around the globe.
Why maintain such a diversified portfolio? Because each year each asset class has a different return, and when these returns are blended together over a period of time, the effect of diversification tends to increase the portfolio return and decrease the portfolio risk. The chart below shows the total return for the past decade for some of the DFA mutual funds we use. You can see that whereas large company U.S. stocks were negative for the decade, many other asset classes were positive – and some substantially positive. We own many of these funds within our portfolios.
A Look Beyond the S&P 500 January 2000-December 2009
Source: Dimensional Fund Advisors. Performance data represents past performance and does not predict future performance.
Even though it has not been a lost decade for stocks in general, it has certainly been a gut-wrenching ride. The decade began with a bear market in which the S&P 500 was down ~ 49% (March 2000-October 2002) and then remarkably sustained a second bear market that saw the S&P 500 drop ~50% between October 2007 and February 2009.
Looking at it this way, given the severity of these two bear markets over the past decade, it is impressive that the S&P 500 ended the decade with only a 9.1% loss.
Although this was a “lost decade” for the S&P 500, it is exceedingly rare. Between January 1926 and December 2009, 95% of all possible rolling ten-year investment periods delivered positive returns for U.S. large company stocks. This past decade falls into the 5% that failed to produce gains.
We hope that this gives you a better understanding of how diversification has improved the performance and reduced the risk within your portfolio. So ignore the talking heads proclaiming that “this time it’s different.” Take a deep breath and remind yourself: diversification within a prudent portfolio does work, buy-and-hold is not dead, and the laws of gravity have not been suspended.
Note: There are numerous ways to segment the universe of stocks. For simplicity in this example, let’s call the six asset classes U.S. large and small companies, Developed International large and small companies, and Emerging Markets large and small companies. Most of our portfolios also contain bonds, which would be a separate asset class. As you may remember, our portfolios have a tilt toward value companies (versus growth companies) and small companies (versus large companies).
-Julie Schatz, CFP®, Jennifer Cray, CFP®, Rich Chambers, CFP®
The S&P 500 is an index composed of 500 of the most widely held (and typically largest) companies in the U.S. While 500 companies may sound like a lot and may seem well-diversified, it’s actually a narrow slice of the universe of companies available for our investment dollars.
At ICM, our portfolios consist of at least six asset classes – not just one (see note below). The portfolios that we are all invested in at ICM contain a piece of more than 10,000 companies. The very smallest companies up to the very largest conglomerates are included in our portfolios. These companies are located in over 40 countries around the globe.
Why maintain such a diversified portfolio? Because each year each asset class has a different return, and when these returns are blended together over a period of time, the effect of diversification tends to increase the portfolio return and decrease the portfolio risk. The chart below shows the total return for the past decade for some of the DFA mutual funds we use. You can see that whereas large company U.S. stocks were negative for the decade, many other asset classes were positive – and some substantially positive. We own many of these funds within our portfolios.
A Look Beyond the S&P 500 January 2000-December 2009
Source: Dimensional Fund Advisors. Performance data represents past performance and does not predict future performance.Even though it has not been a lost decade for stocks in general, it has certainly been a gut-wrenching ride. The decade began with a bear market in which the S&P 500 was down ~ 49% (March 2000-October 2002) and then remarkably sustained a second bear market that saw the S&P 500 drop ~50% between October 2007 and February 2009.
Looking at it this way, given the severity of these two bear markets over the past decade, it is impressive that the S&P 500 ended the decade with only a 9.1% loss.
Although this was a “lost decade” for the S&P 500, it is exceedingly rare. Between January 1926 and December 2009, 95% of all possible rolling ten-year investment periods delivered positive returns for U.S. large company stocks. This past decade falls into the 5% that failed to produce gains.
We hope that this gives you a better understanding of how diversification has improved the performance and reduced the risk within your portfolio. So ignore the talking heads proclaiming that “this time it’s different.” Take a deep breath and remind yourself: diversification within a prudent portfolio does work, buy-and-hold is not dead, and the laws of gravity have not been suspended.
Note: There are numerous ways to segment the universe of stocks. For simplicity in this example, let’s call the six asset classes U.S. large and small companies, Developed International large and small companies, and Emerging Markets large and small companies. Most of our portfolios also contain bonds, which would be a separate asset class. As you may remember, our portfolios have a tilt toward value companies (versus growth companies) and small companies (versus large companies).
-Julie Schatz, CFP®, Jennifer Cray, CFP®, Rich Chambers, CFP®
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