|
Investors
ended the year on high and sour notes
If you
focused on the 25 percent gain in the stock market for
all of 2009, you might be feeling some relief and,
perhaps, even popped some Champagne. Yet, if you've been
longing for the money that used to be in your 401(k) or
IRA, you might still be carrying regret.
The 2000s
are being called the "lost decade," a time
when you made nothing in the stock market. In fact, it's
worse than that.
If you
had started the 2000s by investing
$10,000
in the
Standard & Poor's
500, a rough approximation of the stock market, you
would have about
$9,180
,
S&P
analyst
Howard Silverblatt
said.
That's a
result of two of the worst bear markets in history: a 49
percent drop in 2000-02 and a 56 percent decline between
October 2007
and early
March 2009
.
It's been
a sobering time for investors for whom stocks were a
no-brainer in the 1990s. And it leaves lessons for
thoughtful investors.
TIMING
MATTERS
When you
look at the downturn, you might conclude that anyone who
invests in stocks is nuts. But the time period you
analyze skews your view. Though you would have lost
roughly 8 percent of your money in the stock market this
decade, the 1990s were a very different time.
During
the '90s, stocks gained 433 percent, or about 18.2
percent a year on average, Silverblatt said. That
compares with a 0.85 percent average annual loss in the
2000s.
If you
look at both decades, what you have always been told is
true: Stocks can be horribly risky for people who need
to get their hands on their money quickly. Yet, the long
term still builds confidence for people with years to
invest.
Silverblatt
emphasizes that the results for a person who invested
money 20 years ago show a 389 percent gain, despite the
scary last two years.
BOTTOMED
OUT
As is
typical in all bear markets, investors tried to hold on
to stocks early because of their belief in stocks for
the long run. But as their confidence faded and losses
mounted, by some 50 percent early this year, they fled.
A
$10,000
investment before the downturn became about
$4,400
in early
March 2009
. Investors who have held on since have enjoyed a
historic rally and now have roughly
$7,300
.
Though
those who fled might have needed to secure their money,
regaining losses is years away. In a savings account
paying 1 percent a year, the sum will be about
$5,400
in 20 years. In bonds paying 4 percent, the person will
have about
$10,000
in 20 years.
FUTURE
HARD TO PEG
Of
course, an investor would have been wise to have seen
the downturn coming in 2007 and moved to safety. But
investors are not good at seeing the future and
generally feel safest at market peaks. Besides, at the
end of 2006, investors had gained 15.8 percent.
Few pros
saw a downturn coming. Likewise, they missed the 66
percent rally that started the healing after the 56
percent decline. Instead, most were urging caution and
fearing a second Great Depression.
DIVERSIFYING
HELPS
Because
even the pros can't figure out when stocks will climb or
fall, many don't try. They set up diversified portfolios
with stocks and bonds, and try to get investors to hold
on through good times and bad.
If
someone had invested
$10,000
in a diversified portfolio of 60 percent stocks and 40
percent bonds, they would have come through the lost
decade OK, not great. Their
$10,000
would total roughly
$13,800
now.
The stock
portion is based on 30 percent in large stocks through
the
S&P
500, 10 percent in small caps through the Russell 2000
and 20 percent in international stocks through the MSCI
EAFE index.
And if
retirees had put 30 percent into the
S&P
500 and 70 percent into bonds through the Barclays
Capital Aggregate Bond Index, they'd have about
$15,300
.
In other
words, the best lesson for investors is to cut their
risks by mixing stocks and bonds and reducing the amount
of stocks based on age, not market conditions.
———
|
