You’ve probably noticed, the markets have been an unnerving place in which to invest lately, especially for successful professionals with significant wealth. Nobody enjoys feeling like they’re making an investment mistake by lingering on the sidelines when others are on a tear. With a number of big, bold stocks surging so far ahead of the pack this year, it may feel as if chasing after these seemingly unstoppable winners is your only choice for getting ahead. 

The actual mistake would be to believe that’s true. History is filled with cautionary tales of investors who bet too big on short-term growth spurts from concentrated sets of securities. Instead evidence strongly favors diversifying your investments across an array of expected sources of global returns — and then sticking to a disciplined, evidence-based long-term investment strategy through good times and bad, according to your personal financial goals. 

A Historical Perspective on the 2010s for the Long-Term Investor

It’s not entirely your fault past investment lessons are so quickly forgotten. The popular press is always touting the latest, greatest market performers while glossing over the bigger picture. Across the past decade or so, a relatively small handful of large U.S. companies (such as Apple, Amazon, Microsoft, Alphabet) have been driving up U.S. large-cap stock prices in general, which have far outperformed a more diversified mix of small-cap, value and international stocks. 

Exhibit 1: The 2010s

During this “best of times” decade following the global financial crisis, the total return for the S&P 500 Index more than tripled. U.S. large-cap growth stocks were among the brightest stars, and have continued to do well through the 2020 Covid-19 crisis. 

Did you decide to bulk up on more of these most recent outperformers: the best countries, the best sectors or the best individual companies? Or, even if you have remained more diversified, when speaking to your peers, have you felt like you might be missing out compared to them? After all, most of the other asset classes haven’t kept pace with the S&P 500 during the past decade, which might have caused you to question your broader allocations.

In short, holding a broadly diversified portfolio is expected to help smooth out the swings, but it also can create feelings of regret. There’s even a psychological term for this: It’s called tracking-error regret, when you compare yourself to inappropriate benchmarks (such as peers, whose financial goals may dramatically differ from yours) and feel like a relative failure.

An Informative Look Back to the 2000s

To combat tracking-error regret, it can help to take a longer view of market history. Let’s explore what we can learn from the not-too-distant past known as “the Lost Decade” of the 2000s. It reveals quite a different story than the 2010s had in store for investors. The 2000s tell a nearly polar opposite tale, in fact, when international small-cap value investments were riding high, and the S&P 500 became the unloved stepchild.

Exhibit 2: The 2000s

Do you remember how that felt? The Lost Decade resulted in disappointing returns for many investors who were concentrated in the S&P 500. While the index had averaged more than 10% annualized returns before 2000, it returned a negative annualized −0.95% from 2000–2009. 

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Evidence-Based Investing Remains the Antidote

By looking across the decades, we can see a globally diversified investor may feel left out when one asset class is roaring ahead of the others. But it’s important to remember how to remain better positioned to prevail over time. 

We’ve often suggested investors may want to take a long-term, evidence-based perspective toward investing. Stock market performance since 2000 supports this point of view. Over the past 20 years (see Exhibit 3 below), investing in U.S. and international large- and small-cap value companies presented investors with opportunities to capture annualized returns surpassing the 6.06% delivered by the S&P 500. This was despite underperforming periods, including the most recent decade. 

Bottom line, longer time frames increase the likelihood of experiencing a satisfying, overall investment experience by having a diversified portfolio that targets areas of the market with higher expected returns, such as small-cap and value stocks.

Exhibit 3: 2000-2019

Capturing Higher Expected Returns: Easier Said Than Done

We hope it now seems more logical to consistently tilt your diversified portfolio toward these and similar sources of higher expected returns. Still, the first two decades of the 21st century have reinforced how sharply returns can vary from one period to another. The volatility makes it tough for investors to see past the current trends toward long-range expected outcomes. 

No one knows what the next 10 months will bring, much less the next 10 years. It can be hard to maintain patience and discipline for years, if not decades. But those who can do so are more likely to achieve long-term success. Don’t you wish that to be you? 

What a Cogent Advisor Can Do

Even though our team can create the right, evidence-based plan for you, there’s one thing we cannot do: We cannot decide for you that it’s time to become an evidence-based investor. Your financial future is in your hands, so you must take the steps to embrace the lessons of the past. 

As soon as you’re ready for that, we would love sit down with you for a Cogent Conversation.® We’ll listen to what success looks like for you, build a plan tailored to your goals and needs, formulate a long-term investment strategy and partner with you every step of the way to help make your dream become reality.

Call us today!

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