Hey Reader,

At my last job, I had the privilege of working with some of the brightest minds in investing.

We had weekly investment calls dissecting economic data, geopolitical risks, and plenty of other things I didn't understand at the time.

However, the Chief Investment Officer (who is the smartest person I've met to this day) always made sure to zoom out and stress one point that nearly everyone forgets.

I'll illustrate the point by looking back at one of the most difficult periods in the US stock market. Let's see if you can figure it out by the time you reach the end.

One quick announcement before we dive in...

Now that summer is over, most people are finding time to catch up on their finances.

So, I started offering one-time financial plans for anyone who wants to make sure they're on track and making the most of their money.

Now, let's jump in!

The Lost Decade

To say the 2000s were a difficult time for US stocks is a drastic understatement.

The new century started with the burst of the dot-com bubble and was followed up by the Great Financial Crisis.

After a decade (12/31/1999 to 12/31/2009), a $100,000 investment in the S&P 500 would have been worth ~$91,000.

At various points, the investment would have been valued at less than $60,000 and reached a bottom of ~$54,000 in March 2009.

A decade of staying invested only to lose money while inflation eroded your purchasing power?

That's not what anyone signs up for when they start investing.

Ask yourself...

• Would you have stayed invested?
• Would you have continued adding money?
• Would you have called it quits to save yourself the stress?

Now, consider this...

It wasn't a lost decade for everyone

Other major asset classes didn't fare as poorly as US large-cap stocks.

The Bloomberg US Aggregate Bond Index returned almost $85,000 over that time (6.33% annualized return).

International Stocks (MSCI ACWI Ex USA) returned ~$36,000.

A portfolio of 60% global stocks (MSCI ACWI) and 40% bonds (Bloomberg US Aggregate Bond Index) returned ~$48,000.

To summarize, a diversified portfolio generated higher returns over that period and made for a much smoother ride.

The 2010s Comeback Story

After a decade of underperformance, US stocks found their footing and dominated the 2010s.

So, did the 2010s domination make up for the lost decade?

After the dust settled...

Assuming you invested $100,000 in the S&P 500 on 12/31/1999 and never sold, you would have come out ahead at the end of 20 years.

Things to think about

It's easy to look at the data in hindsight and say you would've stayed invested in a 100% US stock portfolio, but there's no telling what emotions you'd feel after watching your investment get cut in half twice and underperform other major asset classes for 10 years.

A diversified portfolio finished with only $26,000 less while experiencing a fraction of the volatility and never falling below $100,000 after recovering from the dot-com bubble by the end of 2003.

It took ~18 years for the S&P 500 investment to catch up to the diversified portfolio.

Whether it's through volatility, inflation, or liquidity risk, going all in on one asset class will eventually burn you if you play with fire long enough.

Conclusion

There's no telling what the stock market will look like or which asset classes will perform the best over the next 5, 10, or 20+ years.

However, it's a lot easier to stay invested (and continue investing) when you have a portfolio designed to meet your goals and limit volatility instead of following a generic investment strategy with no context.

Which brings me to the lesson I learned from my old CIO...

You can't achieve long-term returns if you don't manage risk along the way.

So, find the strategy that keeps you in the game long-term.

Until next week!

Matt Garasic

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Disclaimer:

This is for general educational and illustration purposes only. This should not be taken as individual investment, tax, or legal advice.

Consult your legal, tax, and financial team before implementing any financial strategies for your specific circumstances.