Wednesday, January 6, 2010

The Decade From Hell For Investors?!

Time Magazine has called it the "decade from hell". CNBC recently ran a one hour special entitled The Bubble Decade detailing ten years of boom and bust cyles. Politicians have foreshadowed apocolyptic financial doom around every corner. Has it really been that bad of a decade for investors? I would argue no if you are a long term buy and hold investor that invests primarily in low cost index funds, and apparantly I am not alone. Forbes recently published an article by Richard A. Ferri detailing the relatively solid decade most disciplined long term investors had.

We all agree that US stocks were not a fun ride, but that is not the most important question. Rather the questions to ask are these: How did you perform over the past decade, and how did a diversified portfolio of index funds perform over the same period?

Index fund investors who remained disciplined and stuck to a simple strategy of diversification and rebalancing fared pretty well.

Ferri goes on to give actual 10 year annualized returns for a few different asset allocations. Mostly broken up by percentage of stocks and bonds. All of his examples acheived at least a 3.1% return. Not great? Well that may be true but he makes a good point.

All the portfolios outperformed the CPI, and that means all portfolios made money in real terms. Since this is true, was the first decade of this millennium really an investor's hell? Not as I see it. Yes the volatility was unnerving at times. Yes, the performance of US stocks was well below its historic average. However, a diversified and disciplined index investor weathered the past decade just fine.

I would go a step further in that we do not know what the future holds. What if the next decade sees a great rise in the annualized return of the market. Then the disciplined investor who continued to invest in index funds throughout the "decade from hell" was actually not experiencing hell at all....they were merely buying on sale! Although this decade was undoubtedly hard on some who were approaching retirement or needed a large portion of their savings, the reality is the majority of people out that not only have an investing time horizon that is long enough to recover, they may actually thrive. I would also be interested to see what the alternative to the disciplined investor looked like in the past decade. What was the 10 year annualized return for the guy who listened to the 'experts', the guy who took the stock tip from his neighbor, the woman who paid hefty commissions and fees for someone to manage their money? How did they fair? My guess is much, much worse....

No comments: