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Weekend Investor
Dec. 11, 2009, 9:18 p.m. EST · Recommend (4) · Post:
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) -- This is the way the decade ends; not with a whimper but a bang.
Stocks are on a short fuse, but so are stock investors. Call these past 10 years for the U.S. market "lost," "losing," "lapsed" or anything you want; Jack Bogle, founder of mutual-fund giant Vanguard Group, calls it a "tin decade" after the "golden" one of the 1990s. The fact is this was a dismal decade where many investors' hopes, plans and expectations were dashed.
Don Phillips, managing director at investment researcher Morningstar Inc., offers lessons for investors from a losing decade. Jonathan Burton reports.
It didn't have to be this way. Between the Internet bubble and the real-estate bubble, too many of us lost sight of time-honored portfolio strategies -- diversification, asset allocation, rebalancing and more -- that could have made a bearish decade more bearable. Even with stocks coming back strongly this year, we're quick to dismiss these market maxims as stale chestnuts.
After a decade like this one, it's understandable investors would want a fresh start. The Standard & Poor's 500-stock index /quotes/comstock/21z!i1:in\x (SPX 1,106, +4.06, +0.37%) lost around 25% from Dec. 31, 1999 through Friday. Including dividends, the benchmark was down about 10%, for an annualized loss of 1%, according to S&P.
It's the blue-chip index's first losing decade ever on a total return basis, though it has lost before on a price-only basis, noted Sam Stovall, chief investment strategist at Standard & Poor's Equity Research. Even in the Depression-era 1930s the S&P 500 produced a 10% total return, largely due to generous corporate dividend yields that topped 5% annually versus barely 2% today.
The good news is that since 1900 the U.S. benchmark has never declined on a price-only basis over two consecutive decades, which augurs for a better stretch ahead for stocks.
Yet many shareholders won't be in the game. Even as stocks have gained yardage, investors took to the sidelines. More than $36 billion has fled U.S. stock funds so far this year while taxable and tax-exempt bond funds added $357 billion, reports the Investment Company Institute, an industry trade group.
Investors could be fighting the last war. "We've already gone through a painful dismal decade," Stovall said. "Chances are the next decade has to be better."
Maybe so, but no matter what the future holds for stocks, you'll be ready if you keep in mind some important lessons that were true 10 years ago and will be 10 years from now:
Blending myriad stock classes insulates a portfolio from market swings, or so investors believed. Yet when almost every type of stock lost money in 2008, diversification's detractors grew: Financial advisers and fund managers failed; they should have shorted stocks and gone into cash and bonds.
Diversification isn't the problem; it's how we interpreted it. U.S. stocks were billed as independent of international markets, and real estate and commodities were separate from that. In truth, they're all equities, and subject to market whims.
"Diversification did not fail," Stovall said. "Our memories and our expectations failed. True diversification comes from stocks versus bonds, not stocks versus stocks, but a lot of people forgot that."
"Diversification has been sold as something that would prevent losses," added Meir Statman, a finance professor at the Santa Clara University in California. "That's nonsense. What diversification means is that if you divide your money between various assets, you will not have all of your money in the crummiest assets. You are in the middle, and in the middle doesn't mean it's going to be positive."
The market's losses in 2008 shook the fundamentals of asset allocation. Stocks for the long run? Forget it. Too much in bonds? Not possible.
In fact, your mix of stocks, bonds, cash and alternative investments affects total return more than the individual investments you choose. Moreover, a portfolio that accurately reflects your ability to handle volatile market conditions will smooth your ride down Wall Street.
For example, allocating 60% of a portfolio to the S&P 500 and 40% to government bonds would have brought 3.1% annualized returns over the decade through November, according to investment researcher Morningstar Inc. A mixture of 40% stocks and 60% bonds would have given you 5%. Combining 20% international stocks with 40% in U.S. stocks and 40% in bonds delivered just shy of 4%. Not great, but not a washout either.
"If you can come up with a good asset allocation to produce returns that are more consistent, investors stay engaged longer and are less subject to knee-jerk reactions," said Aaron Reynolds, senior portfolio analyst at money manager Robert W. Baird & Co.
"A lot of people look back at this decade and the lesson they're taking away is that you've got to time the market," said Don Phillips, managing director at Morningstar.
That's a natural reaction to the deer-in-headlights shock that many shareholders experienced during the global market meltdown. "If only I'd been out of the market," goes the refrain, loud and clear with the benefit of hindsight.
Be proactive, not reactive. Find an asset-allocation range that works and stick to it. Hold more cash if you think stocks are overvalued. But don't jump in and out.
"It's all about having discipline," Phillips said. "In market-timing schemes that discipline goes away. You can lose sight of your longer-term goals."
"My advice is getting simpler and simpler the older I get," said Ted Aronson of investment manager Johnson + Aronson + Ortiz in Philadelphia. "You were at 60% equities and now you're thinking of going to zero -- split the difference. Maybe 60% was never the right amount, but zero isn't either."
- MrJ | 9:37 p.m. Dec. 11, 2009
Holiday shopping news up to now had us all expecting another grim year was already in the books. But November's retail-sales data raises the prospect of a healthy season for the industry and consumers alike.
2:53 p.m. Dec. 11, 2009 | Comments: 58
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