Dec 29 2011
A Decade in Review
News Brief By: Allen G. Yee
If there’s one lesson to learn from the history of investing, it is that the market does not always go up. If you believe that to be true, then why would you invest as if it only goes up? In other words, investors implement buy and hold strategies more than any other, why? The graph, just below, shows the historical rise and fall of S& P 500 Composite. The blue segment of the line shows rising markets (Bull Markets) and the red line depicts falling markets (Bear Markets). Please note, these blue and red periods are generally prolonged periods of time, it is not unusual for a market (both Bull and Bear) to last 15+ years.
Recently, an article featured in the Economic Times, “Learn from the lost decade: Look for stocks that outpace bonds & inflation, stay away from gold,” discussed the fact that from 2000 to date the stock market (the graph right below is of the S&P 500) has lost value. The article highlighted bonds and dividend paying stocks outpacing the S&P 500 and that domestic large cap stocks have gone virtually nowhere since 2000. Further, economically sensitive sectors such as energy, utilities, and consumer staples have performed better despite the Index’s poor showing. The article continues to provide ideas on what to invest both domestically and globally, however what the article fails to discuss is a strategy to limit losses.
Review the graph below; it covers the Nikkei index from 1989 – date. Most investors recall the history of the Japanese index; it achieves a meteoric rise to 38,957 in 1989 only to be mired in a prolonged secular bear market that continues today. The index has lost ~78% of its value from the all-time high and most don’t expect the index to rise to former highs in the coming decade(s).
Clearly, as the article describes, one should review current opportunities in the investing arena and not continue on the current portfolio/strategy just because of past performance. Contrary to buy and hold strategy, one should not hold through declining markets irrespective to risk tolerance and/or time horizon. For example, if you have a 20 year time horizon and can tolerate huge volatility; does it make sense to suffer 30-50% declines? In my opinion, no, just look at the S&P 500 graph from 1929 to 1955, 1968 to 1985 or look at the Nikkei. In secular bear markets it’s necessary to have a different strategy.
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* The graphs listed on this article are for illustrative purposes only and are not necessarily indicative of past or future results for any specific investment. The S&P 500 Index is a weighted, unmanaged index composed of 500 US large-cap stocks. The Nikkei index is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange. Both indexes provide a broad indicator of stock price movements. Investors cannot invest directly in an index.
Learn from the lost decade: Look for stocks that outpace bonds & inflation, stay away from gold
27 DEC, 2011, 09.10AM IST, NEW YORK TIMES
NEW YORK: With only a week left in 2011, the Standard & Poor’s 500-stock index has a dubious distinction: Its performance has been far worse than that of a basic basket of bonds in the last 12 years. But while betting on a large-cap stock index may not have paid off over that time, it would be wrong to assume that this has been the case for all sectors of the market.
A quick glance at the numbers shows that the S&P 500 index of large domestic stocks has gone virtually nowhere since the technology bubble burst in 2000, while the Barclays US aggregate bond index has returned more than 6% a year, on average. Yet long-term-minded investors who had the patience to hold a diversified portfolio have done much better than that in other types of equities, said Sam Stovall, chief equity strategist at S&P Capital IQ.
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