5 Investing Lessons

In the past 19 years, the market has generously imparted its wisdom to anyone paying attention.

A look at how key asset classes have performed during the first 19 years of the 21^st century offers some important lessons about investing that we can take going forward.

Consider three of the largest and broadest ETFs around—the Vanguard Total US Stock ETF (VTI), the Vanguard Total International Stock Index ETF (VXUS) and the Vanguard Total Bond Index ETF (BND). Because these ETFs didn’t exist for the entire period (2000-to-date), I’m using the mutual fund share classes that did.

The chart below shows their respective total performance, including the reinvestment of the dividends for the first 19 years of this century.

What We Learned

1. Own stocks for the long run, but sometimes the long run turns out to be longer than you can wait. So far this century, bonds have outpaced global stocks. Some of us had hoped 2018 would change things, but that hasn’t been the case. Understand this when developing your asset allocation. Many people want almost all equities in their portfolios until I show them this chart.
2. Don’t chase performance. U.S. and international stocks can have very different performances over long periods of time. In 2007, it was hard for me to get clients to put only a third of their equities in international stocks with such great historic performance. Now, it’s hard for me to get clients to go that high due to performance. Even advisors chase the recent past.
3. Consistency is key. You must stick to an asset allocation and rebalance. Returns happened to be similar whether you were 90% in stocks (aggressive), 60% (moderate) or 30% (conservative). What mattered, in fact, was commitment. The chart below illustrates how rebalancing semi-annually (6/30 and 12/31) did versus a buy-and-hold portfolio. Markets aren’t predictable, but people are—in that they will chase performance—thus, rebalancing can give a boost to returns. Going against the herd is simple but not easy.

4. Don’t fall for fads—even academically based ones. Factor investing was once called a “free lunch” by many. Yet small-cap value and many other factors failed miserably. I argue the failure of factor investing was predictable. Other fads such as alternative investments with promised high returns and low correlations or master limited partnerships, viewed as safe alternatives to bonds, blew up as well. Two danger signs of a fad coming are that they are touted constantly (like smart beta was), and claim free excess returns.
5. Keep your bonds boring. The first chart shows just how little volatility BND has versus stocks. But in 2008, when BND gained 7.7%, many bonds lost nearly as much as stocks, with the S&P 500 total return dropping 37%. You will need your bonds—either to live on or to rebalance with.

I’m quite sure the next 19 years of investing will offer as many surprises as the last 19 did. I wish I knew what they would be, but I accept that I don’t.

In the absence of that knowledge, I think you can still increase your odds of success in investing if you follow the above five takeaways the market has offered us thus far this century.

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He has been a nonpaid panelist at one of NGPF's conferences for high-school teachers, but is not part of its organization. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.