Timely Reminder
PAST PERFORMANCE is no guarantee of future results. But we keep hoping.
Over the 10 years through August 2009, the large-cap stocks in the S&P 500 shed an average 0.8% a year, even with dividends included. Meanwhile, U.S. value stocks beat U.S growth stocks, smaller-cap U.S. shares notched 5.5% a year, developed foreign stock markets 2.7% and emerging markets 10.4%.
Fast forward one decade, and the leaders have become laggards and vice versa. Over the 10 years through August 2019, the S&P 500 skyrocketed 13.5% a year, smaller U.S. stocks 12.7%, developed foreign markets 5% and emerging markets 4.1%. And���just to complete the role reversal���U.S. growth stocks have handily outpaced U.S. value.
What does the next decade hold? Beats me. It���s why I favor owning a globally diversified stock portfolio���and why I cringe when I hear investors say that value investing is dead, or they own only U.S. stocks, or bonds don���t make sense at today���s yields, or emerging markets are too risky.
Indeed, I���m baffled by the confidence of these investors, which seems to rest largely or entirely on taking the immediate past and extrapolating it into the future. By contrast, I���ve been at this for 34 years, and my confidence in investment predictions���whether they���re mine or somebody else���s���has never been lower. It took a few decades, but any sense of prescience I once had has now been thoroughly vanquished by countless failed forecasts. We may only have one past, but there are all kinds of possible futures, and I have no clue which one we���re going to get.
That said, these self-confident investors could be right���and, even if they aren���t, they should fare just fine if they hang on for long enough. With the glaring exception of Japanese stocks, recent history suggests that any reasonably diversified, reasonably low-cost bet on a major market segment should pan out nicely if we stick with it for 30 years.
But those words are much easier to write than live. Today���s second-guessing of emerging markets, value stocks and other market segments is a reminder of how much our thinking is hostage to short-term market performance. Our investment time horizon may be 30 years���and perhaps far longer, especially once we figure in our heirs���but our emotional time horizon is often more like 30 days, and even that estimate may be generous.
Indeed, if we own any major market segment for 30 years���whether it���s blue-chip U.S. shares, smaller U.S. companies or foreign stocks���we���ll likely suffer a 10-year stretch when returns are mediocre or worse. If that one market segment is our only portfolio holding, it���ll take great emotional fortitude to stick with it. Most folks simply aren���t that resilient.
That���s why we should build globally diversified stock portfolios, and also throw in at least a small helping of bonds. Diversification isn���t just a defense against our own lack of clairvoyance. It���s also a way to buy ourselves a little more patience, so we���re more likely to stick with the laggards���and be there to make money when they finally return to favor.
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