Part of the fear that drives investors to products such as variable annuities, equity-indexed annuities, and the false promises of active management (including absolute return funds) is the misplaced fear of the recent lost decade in the performance of stocks.
The problem with the lost decade is that most individuals that seek advice do not invest all of their money in the S&P 500 index that did not achieve a positive return for the ten years.
Investors who work with financial advisors often diversify over the spectrum of stocks, bonds, and real estate. In many cases, you might be surprised at the returns investors achieved over the lost decade.
The graph above shows the result of investing in the S&P 500, asafe index of 1-5 year treasury bonds, and a slightly more diversified portfolio (labeled 70/30) from March 2000 to April 2010. The 70 / 30 portfolio is comprised of a 70% equity (includes a 20% allocation to the S&P Global REIT Index) to 30% bond mix. All funds are split over indexes that have passively managed mutual funds or exchange-traded funds that can be used to build a comparable portfolio at a low-cost to the investor.
The results are that while the S&P 500 was largely flat, the diversified portfolio achieved an annualized return of 8.4% over the decade. Investors who believe they would have done better in the safety of treasury bonds would have only achieved an annualized return of 5.02%.
This is not to say that this or any portfolio will avoid risk. However, what it does show is that lost decade is largely scare marketing that uses fear to make investors susceptible to the sale of a costly financial product. The above also shows that strategies such as gambling with active mutual fund managers or financial advisors who sell slogans like “it’s stock pickers market” and “buy-and-hold is dead“ are also not telling the whole story.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/
Performance Data & Disclosures
Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of return results. S&P data provided by Standard & Poors Index Services Group. Dimensional Index data compiled by Dimensional Fund Advisors. Lost decade portfolio is comprised of: 30% Dimensional US Adjusted Market 2 Index, 20% S&P Global REIT Index, 15% Dimensional International Vector Index, 15% Barclays Capital US TIPS Index, 15% Barclays Capital Treasury Bond Index 1-5 Years, 5% Dimensional Emerging Markets Value Index. The above is not investment advice or a solicitation to provide advice. Investors should seek professional guidance prior to making investment decisions.