Remember when the new millennium began and we all wondered what to call the new decade?
Looking back, maybe the ‘00s is appropriate, as least from the perspective of many investors, since the stock market yielded no gain for the entire decade.
There are plenty of reasons for discouraged investors to hang in and look to the future, but it’s also important to have an understanding of what happened during the past decade. And understanding the past decade begins with a look at the decades that preceded it.
The euphoric ‘90s saw the stock market soar and the Dow Jones Industrial Average (DJIA) break the 10,000 benchmark. The advent of the Internet, accelerated globalization and economic growth made it a memorable decade, to say the least.
The 1980s and 1990s marked the best 20-year performance ever for stocks, with gains averaging 16.6 percent a year in the 1980s and 17.6 percent a year in the 1990s, according to data compiled by Yale University’s William Goetzmann and reported in The Wall Street Journal.
However, stock market performance is cyclical and when prices reach new highs, the market typically corrects itself. In retrospect, it shouldn’t be too surprising that two decades of record growth were followed by a decade during which the stock market turned in its worst performance on record - worse even than the 1930s.
According to Goetzmann’s research, overall stock returns for the past decade averaged a negative 0.5 percent a year (data is through Dec. 15), compared with negative returns of 0.2 percent for the ‘30s. Keep in mind, though, that the Great Depression began in 1929, so market performance in the 10-year period that began that year was worse than the past 10 years.
And while this past decade was marked by two bear markets, it ended with a rise of more than 60 percent in the DJIA from March 2009 through the end of the year. Some believe current market growth is unsustainable, yet the housing market is rebounding and the worst of the financial crisis appears to be over.
Companies that became more efficient during the recession may benefit from improved earnings, and when the economic recovery is well underway, we may start to see improvement in the unemployment numbers.
Also keep in mind that the defining events of the past decade were 9/11, when a terrorist attack took the lives of thousands on American soil, and the financial crisis that is finally abating. In spite of these tragic events, the market has bounced back over a period of just 10 months. While it hasn’t fully recovered from the recent bear market, it’s come pretty close to restoring values to where they were before the September 2008 crash.
In contrast, if you were invested in the S&P 500 stocks during the Great Depression, your stocks would have experienced a drop in value of 86.7 percent from September 1929 through June 1932 - and it would have taken you 25.2 years just to break even.
The past decade also saw the arrest of Bernie Madoff after the biggest Ponzi scheme in history was discovered, and the fall of many other financial giants, in some cases as a result of poor business decisions and in other cases as a result of unethical activity.
Lessons learned
So what lessons can be learned from the past decade? And, given that it’s a new year and a new decade, what resolutions should you make to take advantage of the coming year and the ‘10s?
Manage risk.
If an investment is moving in the wrong direction, investors tend to sell it before it goes lower. They don’t want to risk waiting for it to recover, because that may never happen.
But investors should understand why it is moving in the wrong direction before selling. Many stocks were caught in a selling frenzy last year, but have recovered. On the other hand, many stocks have not recovered.
Even the best money managers lose money on some investments. Sell when circumstances merit selling. Take the loss and move on.
As we’ve repeatedly stressed, diversification is the best way to control risk. The market crash of 2008 was an exception to this strategy. Everything except cash and U.S. Treasuries declined during that period. Today, "experts" are offering many opinions about what happened and what’s going to happen next. However, we believe that if your portfolio is properly diversified, it will be less volatile and you’ll have less downside risk.
Events such as 9/11 or Hurricane Katrina cannot be predicted. A diversified portfolio can help you control the financial damage. Investors should note that diversification does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio.
Think global.
The world became smaller in the past decade, which saw the emergence of China and India as economic superpowers. While people in China and India still live in relative poverty, both countries are likely to become much more successful and more powerful in the coming decade.
Other emerging countries are also likely to experience success. Investors seeking higher long-term returns as well as diversification will need to consider investing internationally.
Don’t give up on stocks.
Stocks historically provide the best returns. The past decade and the 1930s were the only decades when stocks failed to have a positive average annual return. Past performance is no guarantee of future returns, but the market could fare better in the coming decade.
Invest in bonds, too.
On the whole, corporate bonds and Treasuries delivered better returns for investors than stocks during the past decade.
According to the Associated Press, funds holding corporate bonds with maturities longer than 10 years returned 8.13 percent over the decade, while corporate bond mutual funds earned 7.84 percent. Those returns are modest for a year, never mind a decade, but the S&P 500 was down 23 percent for the same period.
So are bonds the best place to invest today? Bonds have an inverse relationship with interest rates. They perform well when interest rates are falling, but lose value when interest rates rise. While there may still be money to be made in bonds, interest rates have been at historically low levels for a long time and are bound to increase as the housing market and the financial sector recover.
Again, a diversified portfolio with a modest percentage of investments in bonds provides an opportunity to take advantage of market conditions, while withstanding potential losses when interest rates increase.
Save more.
One positive outcome of the financial crisis has been that consumers are saving more. The savings rate has risen from less than 1 percent in early 2008 to 4.7 percent in November 2009, according to Consumer Reports.
It’s also encouraging to note that a survey by Putnam Investments found that "saving more" is the number one New Year’s resolution this year. It is the top resolution for 36 percent of those surveyed, compared with 34 percent whose top resolution is losing weight and exercising more.
Paying yourself first, by making automatic payroll deductions or otherwise setting aside a portion of your paycheck, is the best way to ensure that you save on an ongoing basis.
Of course, savings are useless if you’re running up your credit card bills. Use credit cards sparingly and don’t spend what you don’t have.
Know who you’re investing with.
Many very smart and very wealthy investors were fooled by Bernie Madoff and other unethical money managers.
How can you avoid being fooled? Before turning your life’s savings over to an investment adviser or financial planner, be sure to check references. Conduct an Internet search and check with the U.S. Securities and Exchange Commission to see if anything incriminating turns up.
Review the money manager’s performance and be suspicious if you see too much consistency. The market has been exceptionally volatile in recent years. It would be virtually impossible for even the most astute money manager to have consistently positive, above-market returns for the past decade.
Don’t let finances stress you out.
If you control your finances, your finances won’t control you. You’ll feel less stressed and be able to spend more time with your family without feeling stressed out.
Have a positive attitude.
Welcome to the ‘10s. May you have a Happy New Year and may the ‘10s be a perfect "10" for you and your investments.
Darrell J. Canby, CPA, CFP, is president of Canby Financial Advisors, LLC, a registered investment adviser at 161 Worcester Road, Suite 408, Framingham. He offers securities as a Registered Representative of Commonwealth Financial Network, Member FINRA/SIPC. He can be reached at 508-598-1082 or dcanby@canbyfinancial.com.
