A “decent decade” after all?

Posted by on January 15, 2010 @ 9:10 am in Investing

Commentators almost seem to have been competing to coin the catchiest—or most negative—label for the ten years from the end of 1999 to the end of 2009. It’s not surprising that some have called it the “Decade from Hell,” given the 9/11 attacks, wars in Iraq and Afghanistan, Hurricane Katrina, a deadly tsunami, the nastiness of domestic political discourse, soaring unemployment and federal budget deficits, etc.

Comparatively speaking, investors had it easy—merely having to cope with two severe bear markets for stocks within the decade, along with a nasty housing-price slump, the credit crisis, the rescue of a number of financial institutions, and burgeoning federal deficits. Because the overall U.S. stock market had an average annual return of –0.25% (as measured by the Dow Jones U.S. Total Stock Market Index), the past ten years have been called “the lost decade” for stocks. And it definitely was no picnic.

However, investment advisor Richard A. Ferri, writing in his “The Indexer” column on Forbes.com, argues that it was actually “a decent decade” for diversified buy-and-hold investors.

He notes that, as nasty as it was, the decade was not disastrous for a diversified portfolio—especially one that was rebalanced periodically to keep the asset mix in line with the portfolio’s intended asset allocation. Mr. Ferri’s numbers are accurate, and I agree with his defense of a buy-and-hold approach to a diversified portfolio strategy.

But the tricky part—as always with investing—is being able to stick with the plan, either when a particular segment of the market is soaring or when it is plummeting. For example, even when you believe that rebalancing is the smart thing to do, it can be emotionally difficult to add to the portion of a portfolio that’s been underperforming or to reduce the portion that’s been on fire.

Notes: All investments are subject to risk. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results. The link to Forbes.com will open a new browser window. Vanguard accepts no responsibility for content on third-party websites.

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