A decade ago, the stock market emerged from the turbulent-but-profitable 1980s to forecasts for mediocrity.
The good times, we were told, could not last. No less an authority than Jack Bogle, founder of the Vanguard Group and the pioneer of index fund investing, told investors that single-digit stock market returns were likely.
There were a number of prognosticators suggesting that investors shift their asset allocation heavily toward bonds. We know now, of course, that those answers were wrong.
During the last decade, the Standard & Poor’s 500 index posted double-digit returns in seven years, and topped 20 percent gains six times.
The last half of the 1990s was phenomenal: In the last five years, according to Lipper Inc., the average large-cap growth mutual fund never had a year with returns below 20 percent.
Yet as we emerge from the 1990s, the forecasts are again that the good times cannot last. No one is risking their neck giving doomsday forecasts, but every bit of market history says this unprecedented run can’t go on forever.
The question for investors is how to prepare for the next year and the next decade.
The answers, however, are going to sound stale and tired, the same kind of thinking that was in place 10 years ago and that dominated much of the ’90s: Stay fully invested and diversified.
“When the ’80s ended, everyone said there was no way that the good times would carry into the ’90s,” says Roy T. Diliberto of RTD Financial Advisors in Philadelphia. “We kept hearing about history, about reversion to the mean and how performance would average out, but, lo and behold, the ’90s turned out even better.
“Sure, things could slow down and, yes, logic tells us that this can’t go on forever, but you shouldn’t bet against the market these days. The bet to make is diversification.”
Ironically, diversification is a strategy that was being dismissed by some prominent financial advisers, most notably Bob Markman of the Markman MultiFunds, as recently as a year ago. Then again, a year ago no one was forecasting that small-cap stocks would be up 50 percent in 1999, or that Japan and the emerging-market economies would have a big turnaround.
That points out one of the key benefits of avoiding the temptation to load down your investments in one hot area, most notably domestic technology/Internet stocks and funds. By spreading money around, you have a better chance of always having some exposure to whatever is “hot.”
But many financial advisers worry investors will shy away from the tried-and-true methods of riding out solid investments for the long term.
Since most of the investing public has been in the market only for good times, there is the fear that today’s investors are like gamblers who make a big score on their very first trip to the casino. They think they will always be that fortunate, and they tend to gamble more.
In 1999, more than 100 mutual funds finished the year with returns of more than 100 percent. In the preceding 25 years, the most funds to top that mark in a year was eight, and that occurred in 1998.
The recent success is what has investors reaching, keeping their aim high. Recently, for example, I got several letters from investors who wanted to know what was “wrong” with certain mutual funds they owned. In each case, the funds in question had earned between 25 and 55 percent for 1999, which was a fine year until compared to a few high-flying peers.
It is those investors–the ones who will try to make the new decade live up to the legacy of the ’90s, rather than shooting for solid returns and hoping for good luck to make those gains spectacular–who worry financial advisers.
“You don’t worry about comparing one time period to another, you worry about doing as well as you need to financially,” says Terry Siman of Executive Financial Services, another Philadelphia-area advisory firm. “You dedicate yourself to reaching your financial goals, not to pursuit of big returns. If you do the right things, big returns will come to you.”
Adds Michael Lipper of Lipper Inc., which tracks the performance of mutual funds: “You can’t extrapolate 1999–or maybe even the last five years–and project those kinds of returns going forward. That would be foolish. But that doesn’t mean you should get out of the market and give up on making good returns, either.”
In short, experts are saying one of the best ways to profit in the new decade will be to keep the faith from the old one, to remain cautiously optimistic.
Thanks to the huge appreciation of the last 10 years, many investors have more than they ever dreamed of for their current stage of life. The compounding effect on that money alone will help them reach their financial goals, even if market returns resume a more historic–read “closer to 10 percent annually”–pace in the future.
Investing, in every market environment, is a leap of faith, a belief that economies grow over time, even if they have small hiccups along the way.
Investing in the companies and industries that produce the economic growth remains the best way to increase your money.
Many people stop short of investing simply because they compare one time period to another. Financial adviser Ross Levin of Accredited Investors of Minneapolis noted that someone who looks at the market of the late 1990s could easily come to the conclusion that “the best has to be over.”
Once they adopt that mentality, they have a reason not to invest or to be disappointed in historically good returns that don’t live up to the market’s recent boom times.
“It’s very easy to look at this market and be worried,” says Levin, “but ask yourself what your alternatives are. If you’re going to change your ratios and allocate a lot of money to bonds, you certainly guarantee that you will not do as well in the next decade as you did in the ’90s.
“I have no idea what the market will do in the next 10 years, but I know that I will be better off participating in it than sitting on the sidelines thinking it can’t possibly be as good as it was yesterday.”
Perhaps that is the lesson investors need to keep in mind as they go forward into the new decade.
Investing in the years ahead will be fundamentally the same process it has been for decades; all that changed in the ’90s were investor expectations.
If you make your expectation saving enough to invest wisely in pursuit of your financial goals, the markets will reward you, even if outlandish returns fade into history.
