Lessons From The Lost Decade (2000-2009)

Lessons From The Lost Decade (2000-2009)

by | May 14, 2019 | Kristi de Grys, Psychology of Investing, Research, Tech Focus, Wealth Enhancement

“Past performance is no guarantee of future results” is a required compliance disclosure used by money managers when reporting performance. Unfortunately, it is truer in the world of investments than almost anywhere else. When you find a 4.5-star restaurant on Yelp, there is a high probability that you will have a positive experience. Statistically, funds that had the best performance over the past three years (or one year) are no more likely to outperform the following three years than any other fund.

The same is true at the portfolio level. In the late 1990s, U.S. growth stocks were the best performing asset class and investors flocked to the S&P 500. We introduced the Merriman MarketWise All-Equity Portfolio in 1995 in the middle of this period. After the first five years, the cumulative return of the Vanguard 500 Index Fund was more than 2.5 times that of MarketWise, as Figure 1 shows. What happened over the next decade from 2000 through 2009? The exact opposite.

 

Over the tumultuous decade from 2000 to 2009, the MarketWise All-Equity Portfolio (after fees) was up 70% compared to the Vanguard 500 Index fund which had lost -10%, as Figure 2 shows. That 10-year period during which the S&P 500, cumulatively lost money is commonly referred to as the lost decade. It was a painful period for many investors. Their faith in the S&P 500 had been strengthened by nine straight years of positive returns (six years exceeded 20%) and by watching it outperform major indices around the globe.

While it was a difficult period, the investors who suffered most were those who switched investments based on past performance. Figure 3 starkly illustrates the effect of “chasing” good recent performance. The blue and orange lines show the cumulative returns of the MarketWise All Equity Portfolio and the Vanguard 500 Fund. The gray line shows the cumulative growth of funds invested in the MarketWise All-Equity Portfolio from the 1995 inception through 1999 and then in the Vanguard 500 fund from 2000 through 2009. While after fees, the MarketWise All-Equity Portfolio slightly outperformed the Vanguard 500 Fund, investing in either approach yielded solid growth. The investor who switched from MarketWise to the Vanguard 500 Fund at the top of 1999 ended up with less investment growth than the investor who stuck with either strategy throughout the whole period.

2009 to 2017 the S&P 500 again delivered nine straight years of positive returns and outperformed most major world indices. In 2018, the index was down -6.6% but has quickly rebounded in 2019. No one knows what the next ten years will bring. History suggests that past performance is no guarantee of future results and that tides turn, but when that will happen is anybody’s guess.

IMPORTANT DISCLOSURES: The performance results shown are for the Merriman-managed MarketWise All Equity (100%) Portfolio and the nonmanaged Vanguard 500 Fund, during the corresponding time periods. The performance results for the MarketWise All Equity Portfolio do not reflect the reinvestment of dividends or other earnings, but are net of applicable transaction and custodial charges, investment management fees and the separate fees assessed directly by each unaffiliated mutual fund holding in the portfolios. The performance results do not reflect the impact of taxes. Past performance is not indicative of future results. No investor should assume that future performance will be profitable, or equal either the previous reflected Merriman performance or the Vanguard 500 Fund’s performance displayed. The S&P 500 is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market. The Vanguard 500 Fund is a core equity index fund that offers investment exposure to the companies represented by the S&P 500 index. Source of VFINX data is Morningstar.

 

All that glitters is not gold

by | Jul 2, 2012 | Advanced Portfolio Management

Merriman does not include a specific allocation to gold in our standard portfolios. This article, by Bryan Harris of Dimensional Fund Advisors, discusses why gold has not been an ideal long-term investment. It includes the following key concepts:

  • Gold has done well since the year 2000 and in the 1970s, and can potentially be a safe haven during times of political and economic stress. However, for the entire period of 1971 – 2011 gold performed worse than the S&P 500, U.S. small-cap stocks and non-U.S. stocks on an inflation-adjusted basis.
  • From 1980 – 1999, gold experienced a negative return after inflation of -6.5%, vs. strong positive returns for stocks.
  • While gold has held its value against long-term inflation, there have been extensive periods when gold did worse than inflation. Gold is also much more volatile than inflation, and can add substantial volatility to a portfolio.
  • Unlike stocks, which are productive assets which generate growing levels of income and dividends over time, gold has no cash flow and costs money to own.

For more detail and some illuminating graphs, please see the article.

The gap between fund returns and investor returns

by | May 27, 2011 | Psychology of Investing

We advocate that investors choose a diversified portfolio of stocks and bonds, with the percentage in each depending, to a large degree, on their overall risk tolerance (the higher the risk tolerance, the higher the allocation to stocks). When the markets move and the actual weights deviate from the target weights, investors should then periodically rebalance by trimming those asset classes which have done best and buying those assets classes which have not done as well. This simple rebalancing technique removes much of the emotion from investing.

Emotions can have a negative impact on investment returns. Many investors respond to short-term market moves by buying assets after they have gone up and selling assets after they have declined in price. This is just the opposite of what we do when rebalancing our client accounts. (more…)

Performance: Time Weighted Return vs. Internal Rate of Return

by | Dec 10, 2010 | Investing 101

If you happen to ask me, “what is my rate of return?”   I’ll probably answer your question with another question, “which return and why?”  This response usually results in a very cross look shot in my direction.  But, actually there are different measures of return and many investors are unaware of their subtle, and some times not so subtle, differences. Understanding what each of these returns is designed to measure and how they differ will help you make better informed financial decisions.

In the financial industry today there are three measures of return that are frequently used; Simple Rate of Return (SRR), Internal Rate of Return (IRR) and Time Weighted Return (TWR). These measures of return may sound interchangeable but they are actually very different in how they calculate performance. (more…)

Should I make peer-to-peer loans?

by | Jul 21, 2010 | Ask Merriman

I’m a young investor and want your thoughts on peer-to-peer lending. Sites like LendingClub.com are pretty open about returns, default rates, etc. Based on the past three years, this has been a pretty reliable way to get an approximately 10% compound return. I realize that peer-to-peer lending doesn’t have the 70-year history of stocks and bonds, but what do you think about making it a small part of my portfolio?


Over the last several years, peer-to-peer lending (P2P) has been growing in popularity. One P2P Web site, Prosper.com, has nearly a million members. Popularity does not necessarily mean an investment is worthy of your consideration.

P2P is an alternative means for individuals to borrow and lend directly from and to each other, supposedly cutting out financial intermediaries such as banks. The activity is arranged through Web sites as Prosper.com and LendingClub.com. The sites typically charge loan servicing fees averaging 1% annually.

So what’s not to like? (more…)