Investing is tough. Rewarding, but tough.
Last year stocks of internationally developed countries (MSCI EAFE Index) dropped almost 12% and the MSCI Emerging Markets Index lost over 18%. U.S. stocks, as measured by the S&P 500, earned just 2.1% in 2011 and have grown less than 1.0% annually since 2000, failing to even keep pace with inflation of 2.5%. Today’s global market environment seems fraught with economic problems that appear daunting, intractable and unending.
For many, the solution has been to reduce anxiety associated with this uncertainty and wait on the sidelines until economic conditions improve. Although understandable, it is important to recognize by the time that happens stocks will be more expensive to buy (eating into returns) and, of course, there’s no guarantee more negative surprises won’t be right around the corner.
Unpredictable events have always happened and will naturally continue to do so. It is these surprises (both pleasant and unpleasant) that explain short-term variations from positive long-term average returns. But enduring this volatility is what allows investors to be in position to capture the stock price increases that help them achieve financial objectives.
Countries tend to eventually straighten out whatever issues are causing economic turmoil and this sets the stage for a return to growth mode. Although short term experiences can be gut-wrenching, equity markets have typically rebounded in relatively short order (often dramatically and significantly), rewarding investors who remained patient.
Though not pain-free, a strategy that has worked very well historically is one in which investors:
a) Diversified globally
Source: Dimensional Fund Advisors, Inc.
b) Minimized costs
c) Stayed the course
This means developing a strategic allocation plan designed to achieve long-term financial goals, gaining efficient exposure to companies in all well-functioning markets, enduring the inevitable ups & downs of random price movements, and containing investment costs.
Since 1970 (the earliest international data is available) a portfolio implementing this strategy (with 60% allocated to U.S. large, small & value stocks, and 40% outside) grew 11.3% annually, compared to 9.8% for the S&P 500 – far exceeding inflation of 4.4%. Investors had to endure three different periods of agonizingly steep declines when their balances dropped in half, but they were amply rewarded: $100,000 invested in 1970 is worth $9.0 million today, compared to $5.1 million for the S&P 500 (and less for those who bailed out during bad times!).
Maintaining an efficiently diversified portfolio through thick and thin has proven to be a successful strategy for helping investors to achieve their long-term financial goals. 2012 is as good a year as any to initiate a similar strategy for you and your family.
Analysis: Canandaigua National Bank & Trust
This material is provided for general information purposes only and is not a recommendation or solicitation to buy or sell any particular security, product or service. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.