Investors look to a new decade
If you feel your portfolio hasn’t made much progress over the last 10 years, you’re not alone. Historians may well look upon this period as a “lost decade” for investors.
It’s difficult to remember that the environment was completely different at the outset of this decade. As the 1990s came to a close and the world prepared to celebrate the start of a new millennium, economic optimism was peaking and the stock market was wrapping up two consecutive decades of superior performance.
What a difference a decade makes. From 2000 through 2008 (a nine year period), the stock market generated an average annual return of -3.60 percent (based on the Standard & Poor’s 500 stock index, an unmanaged index of stocks). Thanks to a recovery in 2009, the average annual return for the entire decade will be slightly better than that, but still most likely in negative territory.
This came on the heels of what was probably the greatest bull market in the history of stocks. The S&P 500 index returned 17.55 percent on an average annual basis from 1980 through 1989, and 18.20 percent for the 10 year period that ended in 1999. This far surpassed the historic annual return for stocks, in the 9 to 10 percent range.
Though it might’ve been painful to endure if you were actively invested in the market in recent years, there is another way to look at it: you have survived one of the worst decades of stock market performance ever recorded.
Looking back at the history of the market, the only other decade in which stocks performed so poorly was the 1930s, the era of the Great Depression. In all other decades leading up to the 2000s, the broad market (as measured by the S&P 500 or comparable yardsticks) generated positive returns.
Watch for the tide to turn
The stock market reached its low point in the current cycle in early March, 2009. Still, the major measures of stock market performance, including the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite Index, are all still well below the peaks they reached in 2007.
Will the market malaise continue? Factors such as economic trends will have a lot to do with where stocks go from here. History, at least, may provide a glimmer of hope. The market, as measured by the broad S&P index, has never suffered two consecutive decades of poor performance. The negative markets of the 1930s were followed by the 1940s, which generated an average annual return of 9.17 percent (a period that included World War II).
The next weakest decade (until now) was the 1970s, an era of oil price shocks, the Watergate scandal and high inflation and interest rates. The S&P 500 returned just 5.9 percent on an annualized basis for that 10 year period. At the end of the 1970s, one business magazine suggested that equities might never again be considered an attractive investment.
Then came the booming 1980s and 1990s, a 20-year period where the market averaged a return of slightly less than 18 percent per year. The market’s past performance is not an indication of what you might be able to expect in the years to come, but there is some encouragement in the historical record. For stocks to match what has been the historical normal return, some catching up may need to occur in the years to come.
It is important to keep in mind that on a year-to-year basis, stock market performance remains fairly unpredictable. If you are able to maintain a long-term investment perspective, it is more likely that you can ride out the down periods in the stock market in order to benefit from the long-term potential equities can provide.
As you assess the performance of your own portfolio, you need to assess what mix of stocks (compared to other types of assets such as bonds, real estate and cash-equivalent investments) is most appropriate for you. This is an individual decision, based on your own investment time horizon and risk tolerance.
The shape of the recovery
The debate among economists, market strategists and media pundits over the strength of the economic recovery intensified as the third-quarter 2009 gross domestic product (GDP) report revealed that the U.S. economy grew for the first time since the second quarter of 2008.
We have those calling for a V-shaped recovery, in which the economy bounces back strongly, commensurate with the depth of its decline, a somewhat normal pattern. We have those predicting a W-shaped recovery, where the economy recovers in normal fashion only to relapse into a second recession as government stimulus expires before consumers and businesses are back on their feet. We even have the square root symbol () recovery. Under this scenario, we get a modest recovery period followed by a subpar expansion.
No matter what the shape of the recovery, you should consider positioning your portfolio to take advantage of opportunity while avoiding risks.
Dividend stocks
It might be a good time for many investors to consider the benefits of dividend-paying stocks. Larger companies typically pay dividends and historically their stock prices tend to be less volatile than those of smaller companies. Conservative growth in dividend-paying stocks and steady income from the dividends themselves can help insulate portfolios from declines in the market, while still positioning portfolios for potential market rallies. However, investors should be aware that there is some discussion by lawmakers in Washington, D.C. about changing the tax rates on dividends, which could have a significant impact on actual returns of dividend-paying stocks.
Don’t be afraid to take profits
If you have participated in the market rally, consider cashing in on some of your success. The markets rose more than 60 percent from their lows in March 2009, creating strong returns for investors who were able to put their money to work in the stock market during the rally. By taking a portion of your profits, you can build up your cash reserves so that you can take advantage of the next market correction, buying stocks and bonds when they are on sale. Just remember to keep enough savings on hand to cover unexpected, emergency scenarios you could encounter, such as losing a job or a sudden increase in household expenses.
For long-term investors, positioning a portfolio based on a specific shape of the economic recovery might not be practical. It’s typically better to have a balanced and diversified portfolio that can better weather the ups and downs of most market scenarios.
No matter what the shape of the economic recovery, you should conduct a careful review of your financial plan to make sure that your portfolio is in shape for whatever 2010 brings. Consider speaking to an advisor about which investments might be appropriate for you.
This column is for informational purposes only, and is solely published for residents of Tennessee. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Mr. McCamey is licensed in the states of Tennessee and Georgia.
Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation.
Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.
Todd McCamey is a Certified Financial Planner and Financial Advisor with the Knoxville, Tenn., office of Ameriprise Financial Services Inc. He welcomes your comments on this topic and related financial planning subjects.
Mr. McCamey can be reached at (865)690-6169, or by e-mail at todd.a.mccamey@ampf.com.
