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....

Strategic Life Focus

I have been thinking a bit more about the Post For The Optimists and how we as humans react to adversity. It is not easy to stay positive. I think most people would describe me as a positive person, however those who know me also know that I am extremely emotional and in the short term I can get very discouraged and sometimes a little negative. Typically after I get the heart pumping, I settle down and try to analyze the situation and move forward. I have been trying to figure out my reactionary paradox and I think it is all in the way you view the cards you are dealt. I am trying to view things through a strategic life focus. What I mean by that phrase is that you should look at the grand scheme of things. Try to see how the circumstances you are in will affect your life as a whole, given that it plays out how you envision. Will this moment matter in 10 years, a year, a month, a week? In short, think long term. I think that if you view a tough scenario through this lens it can temper some of the childish reactions that we as humans naturally revert to. Just a theory but I am going to give it a shot.

Money Tips - Perspective

http://www.iwillteachyoutoberich.com/blog/why-average-is-not-normal-and-why-most-people-get-this-wrong/

Money Tips - This edition of money tips is all about gaining perspective on investing. First and foremost read a great post at the link above regarding the volatility of the stock market complete with a slide show presentation. Did you check it out? Good. I think the post does a great job at showing how quickly you can get into trouble by trying to time the market. For even more proof look at my picture above detailing 100 years of the market. What do you see? Do you see all the peaks followed by tremendous losses? What would happen if you bought there and how would you know if you were buying at a peak? Pretty depressing isn't it? Not so fast. What else do you notice about the last 100 years of the market. Step back from the screen. It has an upward trend over time. This is great news for you, especially if you are starting young.

The first thing I want to throw into the fray is a concept that many people fail to grasp. You only lock in losses, or gains for that matter, when you sell. You have purchased shares at a current market value when you buy stock or mutual funds etc. I am always hearing people say, I have lost 40% of my retirement in the past year, or I lost $2k in the market this month. Well have you sold your shares? No? Well then technically you haven't lost anything. These are merely paper losses (theoretical losses assuming you sold at that point in time). Currently the market just values your holdings less than it previously did when you bought them.

So now you grasp this concept, the question is how can you use it to your advantage? Well the answer is simple. First off always view your success in investing through the right lens or perspective. You are in it for the long haul. The goal is to achieve your financial goals (see previous Money Tips post) and those aren't going to happen overnight. You aren't destined to become the next Wall St Wonderboy or girl. Your perspective should be long term and should be through the eyes of the eternal optimist. The market is rising, great your share are becoming more valuable and you are building paper gains. The market is falling (like the last two years) even better. Why? Because the assets you are purchasing are on sale. Just because you bought XYZ Co last year for $5 per share and today you can get it for $1 per share, is not bad news. Assuming that you buy! Lets say you can now buy 5 share at $1 a piece so you have $5 worth of XYZ Co this year but now you have gained five times the shares for the same price. If shares were suddenly flat screens, or clothes, or beer you would be ecstatic so treat investing in the same way.

A simple way to buy low sell high is dollar cost averaging, or buying the same dollar amount of assets each month (or any time period). If you consistently buy $100 worth a month you naturally be purchasing less shares when they are highly valued (buying high = bad) and more shares when they are on sale (buying low = good).

I actually have been pulled back lately from investing in the market, however it is not due to aversion to perceived losses.....I just said things are on sale! I have been pulled back to build more liquid capital (cash equivalents in money market funds) in order to posture myself to achieve some of my other financial goals, which in this case is buying an investment property. That being said, I have almost reached my target for cash savings and then I plan to aggressively take advantage of a nations assets that are on sale.

What should I buy you ask? Well I plan on covering asset allocation within Money Tips soon that will give you some insight into what I have set as my strategy (see previous Money Tips) which may allow you to vector in on a strategy of your own. I'd love to hear comments and suggestions regarding the Money Tips posts and the message they are sending so post under comments or send me some hate mail in my profile. So start to buy because now is a great time to buy....wait it's always a great time to buy!