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What Every Investor Needs to Know About the Lost Decade

U.S. News and World Report Smarter Investor

Not everyone lost money during the last ten years.

How many times over the past year have you read or heard about the “Lost Decade?” It’s been a popular topic because a lot of investors lost money between January 2000 and December 2009.

But just because major indices may have been flat or even down during this period doesn’t mean a well-diversified investor needed to follow suit. What many investors don’t realize is that there were sectors of the U.S. economy, as well as some overseas markets, that did very well over the same time period. This is why it is so important for investors to have a well-diversified portfolio.

First and foremost, do your research or outsource it to a professional.

Diligent and comprehensive research is a must for any investor who is managing his or her own money. Taking the time to ensure you are invested in (or just as importantly, not invested in) the appropriate sectors at the appropriate point of any economic cycle can mean the difference between a positive and negative portfolio performance. If you are not qualified to do it yourself, hire a professional.

If you choose to hire a professional, make certain that you fully understand his or her qualifications before turning over the reins or following advice. One of the easiest ways to find out if someone is qualified is to check his or her designations. When looking for advice for complete and comprehensive financial planning, find a Certified Financial Planner. For asset management, look for a CFA charter holder. By the way, “professional salesperson” is not the qualification you should be seeking out.

How would a triple-digit return have sounded?

Let’s take a look at the returns in round numbers of some different benchmarks between January 2000 and December 2009. For that time period, the Dow Jones Industrial Index was down 9 percent and the S&P 500 Index was down 25 percent. If you were an investor who had all of your investable assets in these indices, it was indeed a Lost Decade.

However, there were sectors that were up in excess of 100 percent over the same time frame. The energy sector, as measured by S&P, was up over 100 percent. Additionally, an investment overseas would have netted a big return as well, since the MSCI Emerging Markets Index was also up more than 100 percent for the decade.

Okay, how about a double-digit return?

The Russell 2000 Small Cap Value index was up more than 60 percent for the Lost Decade. The S&P MidCap 400 and the S&P SmallCap 600 both rose in excess of 60 percent as well.

Okay, fine … you just wanted something up over 20 percent?

Three indices were up over 20 percent for the Lost Decade: the S&P Consumer Staples sector, the S&P Materials sector, and the Russell 2000 Small Cap Stock index.

If you had a Lost Decade, what now?

Here’s the key take-away point—just by having a diversified portfolio that contained allocations to the mid-cap, small-cap, and emerging market indices mentioned above over the past decade could have been enough to turn a Lost Decade into a Winning Decade.

If your returns for the decade were good or even stellar, it’s probably worth the time to figure out why. Was it because of luck, solid research, or maybe concentration in one sector? It’s worth knowing why the portfolio was successful and determining whether it was a big bet that went right, or because all of your investments were working as expected.

If you are managing your own money, ask yourself why you were overweight in investments that were down for the decade or vice versa. Laziness? Poor research? Relying on TV shows designed to sell advertising? There could be one or myriad reasons for poor investment selection.

Hire a professional.

If you decide to hire a professional, make sure you understand his or her investment philosophy and that the philosophy is inextricably tied to a complete and comprehensive financial plan. If a professional cannot explain it in terms you understand, it’s probably worth taking a pass on the person or the strategy.

And remember, there were a lot of sectors that were down big-time over the Lost Decade. The telecom sector was down more than 60 percent and the Russell 1000 large-cap growth index was down 40 percent.

David B. Armstrong CFA, is a Managing Director and co-founder of Monument Wealth Management in Alexandria VA, a full service Private Wealth Planning and wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. He has been named one of America’s Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 & 2010) based on asset under management. David and Monument Wealth Management can be followed on their blog at “Off The Wall“, their Twitter account@MonumentWealth, and on their Facebook page. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate, please consult your financial advisor prior to investing. All performance references is historical and is not guarantee of future results. All indices are unmanaged, cannot be invested in directly, and do not reflect the deduction of fees and charges inherent to investing. The prices of small and mid-cap stocks are generally more volatile than large-cap stocks. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC

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