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.
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.
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.
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.
(c) 2010, Chicago Tribune. Source: McClatchy-Tribune Information Services.