“Lost Decade?” That depends on the definition of markets.

It is an understatement to say the world has experienced a radical shift in capital markets. There are more layers of information and opinions on the direction of the world than we've seen in decades. The internet and the media do not always make it easier, but Michael Dubis' weekly contribution through IB blogs will help you sift through the noise and give you some perspective. Read Full Bio

I’ve grown increasingly tired of the media and misinformed talking heads stating we lost a decade of investment returns. It’s simply not true.

Unless, of course, you were not diversified in your portfolio or you failed to rebalance to your risk tolerance. Then, of course, as always, you lost. Nothing has changed when folks think they are smarter than the aggregate capital markets.

Most who say we just lost an entire decade of returns are referencing the fact that the Total U.S. Stock Market Index (assuming Vanguard index) or the S&P 500 Index essentially had a negative return from 2000 to 2009.

So if you were invested only in that type of fund during that period of time, you were first of all not diversified, and secondly, you owned only the large cap U.S. Index. (The majority of that index is market-weighted toward large cap stocks).

Now many of you hopefully did not put all your eggs in the large cap basket, so maybe you had roughly 50% of your portfolio in bonds. Adding bonds to the portfolio (assuming the aggregate bond index) produced a ten year return of about 2% to 3% per year depending on what indexes you used. Not horrible walking through two of the worst bear markets in the past fifty years. Bonds helped in that decade.

During that period, inflation averaged about 2.6%, though, so under that portfolio, you maybe had a break-even portfolio in real terms.

Okay, now if you actually followed the good advice behind global diversification and assuming you maintained your risk-tolerance exposure to the appropriate stock, bond mix globally, assuming a reasonable mix of U.S., International, and real estate (in the form of REITs), your 50% equities, 50% bond portfolio would have returned about 4% to 6%. Yes, it’s not what we saw in the 1990s, but that’s a real return of 2% to 3% above inflation and in line with many historical standards of success behind portfolio diversification.

(Note: This is a rough calculation using Vanguard Index fund performances. The weights to each index obviously determine results, but this is close enough for illustrative purposes).

Overall, this is not a bad place to be in a decade where we faced two of the worst two bear markets in history (2000 – 2001 and 2007 – 2009).

So when you continue to hear these misinformed media and reports saying we lost a decade of returns, remember, that they are likely not telling you the whole story and it depends on where you held your money. Global diversification continues to offer a great alternative in many different economic environments.

Michael Dubis is a fee-only Certified Financial Planner and President of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at financialperspectives@gmail.com.

Disclaimers:
This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this Web site or that of the author.

Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio’s performance are based on historical data and one should not assume that this performance will continue in the future.
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