Looking Back to Look Forward

Milestones are always fun periods to stop and reflect. Sometimes we get so into the weeds of our lives that we cannot see the forest for the trees. Obviously, picking any dates is entirely arbitrary as we came up with the calendar after all, but I would like to step back to what the world looked like for an investor on New Year's Day 2000. The markets had just finished a healthy 1999, with the S&P 500 earning over 20%. Real Estate had a slightly negative year of close to -4%. If we had sat together in front of a crystal ball, we would have seen that we were facing some incredible events. The dot-com bust was about to start in earnest. The S&P500 would be negative for the next three years in a row (-9%, -12%, and -22% in 2000, 2001, and 2002 respectively). We imagine that our conversations would be frequent and painful as you watched a $1,000,000 portfolio become nearly $600,000 in 36 months. We would see in our crystal ball the worst terrorist act in US history, and the US enter one of its longest wars on record, a housing crisis of unprecedented proportions which would drag the markets down to the edge of depression, and a chilling in world trade and cooperation.

Living through all of these events certainly has given all of us more grey hairs. But how devastating was this to our finances? Well, the answer largely depends on your portfolio and your temperament. Allow me to explain. You may have started 2000 with a portfolio of tech companies. You really couldn't go wrong over the past ten years. You're likely seeing incredible returns. However, depending on which companies you bet on, your portfolio might be worthless or decimated beyond repair. Some tech companies went out of business, and some dropped to very low levels. But working with PathWise, we would have been pushing hard to diversify to avoid such catastrophic scenarios. So let us focus on individual segments of the world. Let's think about investing in the entire US Stock Market, Large US Companies (S&P500), the World Stock Market (the US and everywhere else), US Real Estate, and avoiding stocks altogether and just giving loans to the US Government and US Companies (i.e. US Bonds).

Each segment had its good times and bad. Given the poor performance as the start of the 2000s for the S&P 500, and then the crisis in 2008, your portfolio wouldn't have budged from where it started a decade ago. Real Estate would have looked great beginning in 2000 but was decimated during 2007-2009 when it dropped over 50% at one point. World markets looked terrific in the 2000s, only to show poor performance in the 2010s. Assuming you were able to take a long-term view, though, the chaotic moves start to show a not so drastic picture. Sitting here at the start of 2020 and looking back, we can see what the perfect investment was (hindsight is 20/20, right?). So what would you guess? Well, US Real Estate took the crown with an average of nearly 11% each year. Yes, even with the worst real estate crisis on record. The S&P 500 returned around 6% per year, slightly lower than the entire US Market, which averaged about 6.5%. A global portfolio returned just under 5% per year over those 20 years, and a bond portfolio around 5% per year.

Now, for some people, the obvious reaction is to look at the returns over the past 20 years and pick the best performing assets, assuming they will also perform that way over the next 20 years. However, it's essential to understand that while history echoes, it doesn't repeat itself. Where will the next 20 years take us? It's hard to say. We will likely face some very unexpected and perhaps traumatic periods. But a diversified portfolio with Real Estate, US Markets, International Markets, and with a focus on value and smaller companies, would have returned around 9% during the last 20 years. For many reasons, here at PathWise, we think that such a portfolio is unlikely to repeat that performance. We are starting 2020 with US Stocks that aren't cheap relative to history (certainly, it's not fair to call them "expensive" either). It's hard to imagine (though not impossible!) for interest rates to go much lower than where they are. Unemployment also is a very very low level. To say world politics and relationships are on shaky ground would likely be an understatement.

So what to do? Well, we suggest focusing on things we can control. Let's build stable, diversified portfolios based on the latest research coming from universities and places that don't have a vested interest in selling us stuff. Let's make sure that we are taking care of our health, keeping our budgets within reason, and taking advantage of ever-changing rules and regulations to make our financial lives as efficient as we can. Let's be careful about making sudden moves of any sort that may be driven more by emotion than reality. When it comes to your finances and investments, let PathWise do the worrying. You have put your faith in us, so let us take that burden off your shoulders while you focus on things that you value more. We each only have 24 hours in a day, and our time on earth is the biggest unknown we face. Spend every minute wisely doing what you love and value.