We all know how easy it is for investors to get caught up in current trends – whether they are market highs or historical downturns. On the other hand, it is much more difficult to have a long-term time horizon, above all because investment decisions are often influenced by emotion.
An example of this is what many call the "lost decade" of investment in the American market. This term refers to those who earned virtually nothing from investments in US equities during the period 2000 – 2009 as the economy experienced two major recessions at either end of the period. From October 2008 through September 2010, the 10-year yield on US equities was near or below 0% (as evidenced by the Russell 3000 index). This has left a bad taste in many investors' mouths, but that's only part of the story….
Several elements, in fact, must be taken into consideration to analyze this period. First, being diverse has really helped during this time. Hypothetically, investors who diversified across multiple asset classes globally (US stocks, non-US stocks, bonds) would currently have positive 10-year returns (over this period).
A hypothetical portfolio invested 40% in the Russell 3000 index, 20% in the Russell Developed ex-US Large Cap index and the remaining 40% in the Barclays Aggregate Bond index would have generated 10-year returns ranging from 3,3 % in October 2008, 1,5% in February 2009 to 3,7% in September 2010. While diversification is no guarantee against losses, it certainly helps investors protect themselves from overexposure to a single asset class.
Second, the shift from negative to positive returns has been rapid. The 10-year yield was 4,1% in March 2011 – while 6 months earlier, in September 2010, the figure was around 0,1%. When better times came to the markets with the changing environment, investor fears eased and yields fell.
The “lost decade” may have seemed insurmountable at the time – but many investors are investing for the long haul, not the next 9 years. So how is it possible to help savers lengthen their view to align it with their investment horizon?
From the first glance, the wide difference in returns within the individual asset classes is evident, especially over very short periods. For example, if we take non-US stocks, we see returns ranging from +99% to -50% over a one-year period. Conversely, the yield ranges become narrower as the time horizon increases and if a diversified portfolio between equities and bonds is considered (40% US equities, 20% non-US equities, 40% bonds). Historically, therefore, a diversified portfolio has helped mitigate the impact of long-term volatility.
It is said that "time heals all wounds". It is also useful to remind savers that investors have overcome difficult market periods over and over again. By keeping a long-term perspective and considering the benefits of real portfolio diversification, it is possible not to get overwhelmed by current trends in order to overcome short-term movements. A multi-asset portfolio diversified across multiple asset classes, investment strategies and sources of return can therefore help investors more easily cope with market fluctuations and achieve long-term financial goals.
