Financial Planning Article

I’d like to pass on an article from one of my fee-only financial planning associates, Mr. Tom Posey, CFP, J.D:

I’ve had it. I’m calling out an all-too-popular financial fallacy these days. It goes like this: “Stocks? Diversification? Who needs ‘em! Just look at the last ten years. ‘The Lost Decade.’ The S&P 500 Index was down for the whole decade. Stocks did nothing for us.”

Did stock investors really experience a “Lost Decade” from January 2000–December 2009? No. Where did this fallacy come from, then? It came from the mistaken belief that the S&P 500 Index represents all stocks.

Let’s get a grip. Sure the S&P 500 was down slightly from 2000–2009. But is the S&P 500 the only way to invest in stocks? Not by a long shot. The S&P 500 is an index of 500 largest US stocks. It leaves out over 8,000 publicly traded stocks. Consider that small cap stocks were up 5.4%, international stocks were up 1.2%, and emerging market stocks were up 9.8%

Lost Decade? Not for diversified investors.

During this so-called Lost Decade there were plenty of positive returns to be captured around the world – and even here in the USA. The stock investor who wisely diversified across an appropriate range of the many stocks available via sensible, low-cost investments did not experience a Lost Decade. To illlustrate, a portfolio with 70 percent in the four equally weighted domestic stock asset classes and 30 percent in four equally weighted international asset classes would have ended the decade up by about 75 percent.

What does this mean? It means the investor who invested in stocks over the past ten years and didn’t make money has only himself to blame. It means the S&P 500 is not the only stock asset class. It means that, despite its many recent obituaries in the popular investment press, diversification is alive and well.

This is not to say that you should invest all your money in stocks (far from it!), or dump all your money into far-flung asset classes you don’t understand. Investing well is complicated, and you may need an expert financial advisor to help you build an intelligent portfolio of stocks and fixed income holdings that make sense for you. But don’t give up on long-term, well-diversified investments.