We forget a lot things as investors. Currently, we don’t know what a real stock market correction feels like. We certainly had a couple of love taps in the last several years. But we have not had an emotionally-crippling, serious fight with the stock markets. We are soft. It feels like stock markets always go up. And we can certainly forget that they can deliver negative returns for an extended period. Many investors have likely not heard of the lost decade for US stocks.
This story will take us back to the 1990’s. That is a period not too much unlike the 2000’s. The stock markets were roaring with very little volatility. It was the longest US stock market bull run. It was only eclipsed by the current bull run that well, keeps on ticking.
The internet of all things.
Here’s a very good article that looks at the 5 bull markets since the 1970’s. Here’s what that Schroders’ article has to say about the 90’s bull market run.
That 1990’s bull market delivered the greatest returns in percentage at 19% annual (CAGR). That’s greater than the current US bull market run that we are enjoying today. While there were various tailwinds that helped, the bull run was largely in thanks to the development of and euphoria surrounding the internet. Most internet-related stocks had a good chance of flying to the moon. The problem was, these companies were not making any monies.
So instead of investing in companies that make monies and pay dividends it was all the rage to invest in companies that got ‘clicks’. They stopped measuring earnings and started to measure ‘eyeballs’. I kid you not. How many clicks are you getting per share? Put a .com on your company name – get rich off of your stock. Pets.com anyone?
Great tagline, by the way. Pets.com, because pets can’t drive.
Are you surprised that this all ended poorly?
There was a stock market frenzy and anything and everything tech-related was bid up to ridiculous prices and PE ratio (price to earnings) multiples. It was not just the retailers but also the massive tech companies that were building the internet or ‘profiting’ from home and office computers and connections. Think Microsoft, Intel, Cisco Systems, IBM and the Canadian horror story known as Nortel. The PE ratio for the S&P 500 peaked at over 62.
And of course there are so many household names of the day that vanished. They’ve also vanished from memory. The period often goes by the name of the dot-com bubble.
The tech-heavy Nasdaq index offered up a sliver of earnings with a PE ratio of 200. Investors were buying hope.
Courtesy of portfoliovisualizer.com, here’s the S&P 500 run up in the 90’s.
And here is how it all came tumbling down – on top of investors. It was much worse for those of us also invested in that Nasdaq 100 and other science and technology funds.
Of course we see negative returns in the lost decade for US stocks. The above does not factor in inflation, aka real returns. If we click that inflation button on portfoliovisualizer.com the chart looks like this …
That’s some very nasty destruction of wealth and spending power.
But not everything failed for the period. Here’s an interesting chart.
And some assets did even better than those lowly T-Bills. Here’s 10-year treasuries vs the S&P 500 in the lost decade for US stocks.
Longer term treasuries would have performed even better. Again, US treasuries punch above their weight as risk managers.
Canadian and International Stocks.
A US investor who also held some International stocks (good ol’ geographic diversification) would have owned some equities that were also working in the period.
International markets ex-US held up a little better than the US markets.
REITs offered generous returns and diversification in the period. When I looked at the lowest volatility sectors for retirees we saw REITs performing very well. Their prices were not bid up. In fact it was the best performing sector in that early 2000’s correction.
I would add that Gold did not work in the dot-com crash, but did well through the financial crisis. Every market correction has its own roots and causes. Sectors and sub-sectors will obviously react accordingly. And yes, US treasuries performed very well in the financial crisis as well.
The best performing assets of the last 20 years is gold and REITs.
US stocks turn the tables.
As investors know, US stocks have been the runaway winner coming out of the financial crisis. Here’s a chart through 2018. 2019 returns did not change the picture, US stocks extended their lead.
Canadian stocks have not suffered, but they certainly have lagged the US market in the last decade.
And the stinker through the last correction to present is International stocks. They have delivered zero in real returns. But we should remember that US investors have benefited greatly from International diversification in many periods.
Portfolio 1 is International stocks.
Put it all together and we see the need for diversification by geography and various assets, such as good bonds and REITs and perhaps gold, bitcoin and more. I explored greater diversification in the new balanced portfolio post.
We should remember that a stock market can stink the joint out for an extended period. Canadians would have given up returns with a significant home bias over the last decade. US investors who have their own home bias might remember that lost decade for US stocks. Investors around the globe would have suffered in periods due to their home bias. We might all suffer from recency bias. We can likely tack on a few more biases here and there. I’ll sign my name to the top of the list of the guilty.
Think long term. Look at the big picture.
Step back from the last ten years. Try to remove that recency bias. Embrace geographic diversification. Consider additional assets that might help you in the next big correction. And first consider – are you investing within your risk tolerance level? Take steps to align your portfolio with your risk tolerance level.
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