Nothing Lasts Forever
There is an old saying: “Nothing lasts forever.” Unfortunately, it is a lesson that investors as a group have a tough time remembering at the points where it can be most helpful. With US stocks enjoying a strong run over the past several years, it might be good time to revisit past lessons.
Take the late 1990s for example, the euphoric era of technology stocks. The internet was going to transform our world. This New World paradigm caused investors to bid up stock prices of these companies to stratospheric levels thinking the meal ticket would never get punched. Moreover, because other categories of investments seemed lame by comparison, investors increasingly concentrated their bets in this single sector of the economy and avoided the other areas.
Ultimately, we know how this story ended.
For the ten-year period following this bubble peak, covering 2000-2009, the S&P 500 Index produced a total return of -9.1%. This was the second worst ten-year period for the stock market in US history, the worst being the period following the Great Depression. It has thus been dubbed the “Lost Decade.”
Rather than extrapolate the returns of the 1990s into the future, such lofty prices at the beginning of 2000 should have been reason for caution. High prices equate to lower long term returns, not vice versa. It does not mean we all have to be analysts. The principle is there to remind us not to chase returns on assets whose prices have soared.
The other notable feature of this era was that it was only a lost decade for that sector, while other areas did quite well. Real estate investment trusts (REITs) returned 176% over the same period. Smaller US companies not attached to “big tech” returned 121%. Overseas, emerging market stocks returned 154%. There was a wide investment menu that investors shunned at the time they needed them most.
Avoiding the lost decade did not require predicting the future or timing specific events. It only required diversifying the portfolio across a range of different kinds of investments, and reinvesting profits of the high flyers into those areas that had not performed nearly as well.
In 2015 and ahead, we can think of our investment portfolio with these principles in mind. The next few years are likely to unfold differently than the last few years. Assets whose prices have soared may be due for a trim, because nothing lasts forever.