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A Tale of Two Decades

Listen to Best in Wealth Podcast Episode 129

Podcast Intro:

Scott starts the podcast by telling a story about two different periods of time in his life.  The first period being the first 10 years after college where he felt as though he had the weight of the world on his shoulders.  After he graduated college, Scott started working, got married and started a family.  At that time, he recalls having read many articles about how Social Security will not be around in the future and that individuals needed to start saving on their own for retirement.  The problem for Scott was that he was not saving at the time, had no 401(k) to contribute to, was supporting his family all while carrying the burden of debt.   Fortunately for Scott, he started to build a financial plan and things started to get better day by day.  The first 10 years after college were filled with anxiety for Scott while the next 10 years were filled with hope; hope that he would be able to someday retire and that he was acting like a financial steward for he and his family.  So, if you are feeling like Scott during his first 10 years after college, he wants you to know that there is hope and that you can turn things around and work towards your financial goals.

Podcast Topic of the Day:

A Tale of Two Decades

The topic of the day is titled “A Tale of Two Decades” and is about the stock market, specifically, the time periods from 2000-2009 and then 2010-2019.  During these time periods, there are some lessons that can be learned.  Specifically, these time periods remind us that returns can vary drastically from one period to another.  Scott reminds us that investors can have a rewarding investment experience by being disciplined and staying disciplined during the good times and the bad, while also having a broadly diversified portfolio that focuses on known drivers of higher expected returns such as small, value and profitability.  

When looking at these two decades, the S&P 500 had drastically different performance results during each decade.  The worst came first for the S&P 500.  From 2000-2009, the S&P 500 returned approximately -1% annualized during this time period.  In other words, if you started in January of 2000 with 1 million dollars, you ended up with only $900,000 at the end of 2009.  The S&P 500 is only one asset class and therefore, as Scott reminds us, a broadly diversified portfolio is not going to invest in just the S&P 500 asset class.  As family stewards, we are going to invest in a broadly diversified portfolio that covers many asset classes and emphasizes those areas of higher expected returns over long periods of time.  During this decade, many of those other asset classes outperformed the S&P 500.  For example, US Large Cap Value averaged over 4% per year, US Small Cap Index averaged over 9%, International Value was up over 7%, International Small Cap Value was up over 13% and Emerging Markets averaged over 11% during this first decade.  Looking at a balanced, diversified portfolio consisting of all of these various asset classes, including the S&P 500, the portfolio would have returned approximately 7% annualized.

Now let’s flip the scrip and look at the second decade from 2010-2019 (note: data is through June 2019).  The S&P 500 may have had a bad first decade, but now this decade it is having the best of times.  Looking at the same asset classes previously mentioned, the S&P 500 is the highest performing asset class during this second time period returning 13% annualized.  US Large Cap Value averaged just under 12% per year, US Small Cap Index averaged just over 12%, International Value was up over 5%, International Small Cap Value was up over 6% and Emerging Markets averaged just over 4% during this decade.  

Looking at this data from these two time periods, what should investors do?  Scott goes on to discuss that often investors have recency bias and tend to be invested heavily in asset classes that have been doing well in the recent past.  Although this may be great for your portfolio while the asset classes are doing well, the scrip will ultimately flip and then investors will likely be impacted negatively by the asset class tanking.  Scott then reminds us that we need to follow the sound investment principles previously discussed, that is having a broadly diversified portfolio that focuses on known drivers of higher expected returns such as small, value and profitability.  We know that just looking at 1 year, 3-year, 5-year or even 10-year periods is not enough data points.  When we look at these two decades combined, which is a 20-year period (note: data is through June 2019, therefore only 19-1/2 years), the S&P 500 returned 5.65% annualized, US Large Cap Value 7.8%, US Small Cap Index 10.44%, International Value 6.08%, International Small Cap Value 9.96% and Emerging Markets 7.57%.

Podcast Closing Words:

Scott closes out the podcast by making the point that we can use all of this data to help support our investment philosophy and help us maintain our investment discipline.  We cannot know what is going to happen in the next 6 months or 10 years.  We do know that in order to be a family steward and set our families up for the best chance of success, we need to maintain patience through the bad times and the good times.  We know that we need to stay diversified in our portfolios with companies, countries, asset classes and the known drivers of higher expected returns and this will help ultimately help us have a successful investment experience over long periods of time.

 Show Links:

Listen to Best in Wealth Podcast Episode 129 – A Tale of Two Decades

Read the article "A Tale of Two Decades: Lessons for Long-Term Investors"

Visit Best In Wealth Podcast

Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens.   Scott Wellens is the principle at Fortress Planning Group.  Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations.  Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast.  The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.