A Tale of Two Decades — Lessons for Long-term Investing

Join CIO Chris Perras for the 2/21/2020 edition of Stock Talk: Keeping You Connected to Your Money!

Chris: Good morning. My name is Chris Perras. I’m Chief Investment Officer here at Oak Harvest Financial Group in Houston, Texas. Welcome to the February 21st edition of our weekly Stock Talk podcast: Keeping You Connected to Your Money. As of this recording, we are sitting near 3,340 on the S&P 500 up approximately 3.5% year to date. This podcast is a shameless copy of a fantastic piece that was recently penned by our friends and business associates at Dimensional Fund Advisors in Austin. His piece was titled, “A Tale of Two Decades — Lessons for Long-term Investors”.

The first decade of the 21st century- 2000 through 2010- and the second one that recently ended- 2010 through 2019- have reinforced for investors, a timeless market lesson. What’s that lesson? That lesson is, returns can vary sharply from one period to another. Listeners, here we go. I invited our Oak Harvest clients to log in to our web portal to see the accompanying slides and data behind my comments that are coming up. For US large-cap stocks, January 2000 through early 2010 was a lost decade.

Anyone who has invested in large-cap stocks only would have been horribly disappointed for someone who is broadly diversified across other asset classes. The annualized return of the S&P 500 for the 10 years, between 2000 and January of 2010 was about -1% per year. That’s pretty depressing. Moreover, had you been invested in only today’s love affair, which is US large-cap growth stocks, you would have been subjected to a decade of an annual return of close to -4%. Ugh. That’s -4% per year. Ugh. Ugh.

However, people who are invested globally beyond US large-cap stocks into such things as the large-cap value, you have small-cap stocks, where international and emerging markets had good success. How do I define good success? During the decade of 2000 through 2010, US value stocks were up about 3% per year. US small-cap stocks were up about 4% per year and international small-cap stocks were up 7% per year. Every category of emerging market stocks was up between 2% and 5% per year. I repeat. These are annual returns.

Throughout the decade of 2000 through 2010, these categories of assets beat the current markets love child of large-cap growth by 7%, 8%, 11%, and 6% to 9% respectively per year. They didn’t just outperform once by a wide margin. They averaged significant positive returns for 10 years while the S&P 500 went down -1% per year. The US large-cap growth stocks went down -4% per year. Fast forward to the recently ended decade of 2010 through 2019. We see quite the opposite in leadership versus the overall market. From 2010 through the end of 2019, almost all asset categories were positive returning.

With the S&P 500 returning about 13.5% annualized. However, while international and emerging market and small-cap stocks outperformed US stocks in the S&P 500 in the period of 2000 through 2010, the last decade has seen strong leadership in US stocks. Specifically, our US markets were led by large-cap stocks, returning about 14% per year and large-cap growth stocks returning over 15%. Listeners, small-cap stocks have returned close to a positive annualized, 12% return and value stocks about the same over the last decade, around 12% per year.

While these returns have “lagged” the S&P 500 in the last decade, they are substantial. International and emerging market stocks both have had positive annualized returns over the past 10 years. However, international asset classes have returned about one-half of the annual return of the US and emerging markets have returned about one-quarter of the US counterpart. I repeat, however, that they all have had positive annual returns for the past 10 years. Exhibit four on our web portal shows the cumulative investment experience over both decades from 2000 through the end of 2019.

What one will see is that small-cap and value stocks outperformed large-cap and growth stocks over that time period across the US developed international and emerging markets. US small-cap stocks returned close to 8% per year over the 20 years. US value stocks, about the same. US growth stocks averaged about 5% per year for the 20 year period.

Every category in emerging markets returns between 6% and 7% per year for 20 years. The annualized 20-year returns illustrate how diversification across asset classes can help investors ride out extremes and can smooth your overall ride in pursuing a positive long-term outcome.

That brings us to now, February 2020. Stocks and bonds in the US and many other developed markets and emerging markets have logged strong years last year. The US bull market is 10 years old, and current headlines can give investors reason to worry about the future. Some recently were a pushback on globalization, the effects of climate change on stocks, the limits of monetary policy, the fate of Brexit, the US presidential race for 2020, and most recently, the China virus outbreak. Looking ahead who can say what the next 10 years will bring? The only certainty is that the next decade will have its own set of surprises.

Here’s what we learned from the past decade and the ones that came before it. Despite all the change and uncertainty, the fundamentals of successful investing endured. Diversify across markets and asset groups to manage risks and pursue higher expected returns. Stay disciplined and maintain a long-term perspective. Try to take the daily news, which is rarely news anymore, and mainly news anchor opinions with a grain of salt, and avoid reactive investment decisions based on fear or anxiety. Instead, give us a call at Oak Harvests. Let us help you develop a sensible investment and retirement plan based on a strong philosophy, and let’s stick with it.

If your investment advisor had been following the herd, selling stocks, when they were down last summer on tariff concerns, or maybe buying only large-cap tech stocks more recently, give us a call at 281-822-1350. We have a better way. We are here to help you on your way to retiring and staying retired with a customized retirement planning. Many blessings. This is Chris Perras with Oak Harvest Financial Group.

Speaker 2: The proceeding content expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, statistics, and sources are not guaranteed. Content ideas and strategies discussed may not be right for your personal situation and should not be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Investing involves the risk of loss and past performance does not guarantee future results.