The one-word answer is……No, but let’s have a look at what’s been happening and why you shouldn’t sell now...
Investing Returns YTD October 2022
As the graph above shows, it has been an exceptionally tough year for investors. The largest stock market in the world, the US, is down 25%; ‘safe’ global bonds are down 21%; US large-cap growth is fairing even worse - down 33%. Even the fabled 60/40 fund is down 23% with negative correlation between equity and bonds disappearing.
Even Gradragstoriches preferred funds; Vanguard FTSE Global All Cap Index Fund and Vanguard Global Bond Index Fund are down 10% and 14.5% respectively; the performance of bond funds being severely affected by increasing interest rates and the large rise in inflation to over 10%.
The world economy, global stock markets, and global bond markets have all struggled in the first half of 2022. Facing a multi-decade high in inflation, aggressive monetary policy tightening by central banks, and the effects of the Russia/Ukraine war - not to mention the after-effects of the COVID-19 pandemic in 2020, the effects of Brexit in the UK, and the cost of living crisis, it is looking likely that a worldwide recession is round the corner. The forecast for the rest of 2022 is not looking rosy either - but, what about the rest of the decade?
The Lost Decade?
Billionaire investor, Stanley Druckenmiller, recently warned that there is a high probability the US stock market will be flat for an entire decade - 0% returns from stocks before inflation is even factored in. The technical term for an event like this is ‘a lost decade’. While his strong negative views on the stock market are not new, his recent statement has made news headlines and created even more concern for investors who are already on edge.
Lost decades are extremely rare and while all three of these catastrophic time periods were very different, they all had one thing in common: Investors with diversified portfolios, who didn’t invest 100% of their portfolio in U.S. stocks, ended all three lost decades in positive territory - even after inflation:
(The US stock market accounts for 64% of a global index fund and as it is the largest stock market, there is more data available to analyse. Hence, the focus below on the US).
The first lost decade was in the 1930s and was a result of the Great Depression. From 1930 to 1940, the S&P 500 returned a negative 0.5%; intermediate five-year US Treasury bonds on the other hand returned a positive 57%. If an investor took a diversified approach and had a basic portfolio comprised of 60% US stocks and 40% 5-year government bonds, their total 10-year return during the worst period in economic history was a positive 40%. This translates to about 3.4% per year on average.
The second lost decade was the 1970s - if we include the impact of inflation on investment returns. The 1970s did deliver healthy returns to investors - the S&P 500 had a total positive return of about 76% (5.8% per year), but inflation averaged around 7% during that time period, so net of inflation, investor returns were negative for the entire decade.
Like the Great Depression, diversified investors were rewarded. A balanced 60% Global stock and 40% US 5 year treasury bonds had a return of around 146% or about 9.5% per year on average, which means that adjusted for inflation, returns were actually positive.
The third lost decade was the 2000s as a result of the tech bubble bursting coupled with the Great Financial Crisis:
During this 10-year time period, the US stock market was cut in half twice - two 40+% drawdowns. One of these occurred when the tech bubble burst in the early 2000s and the other was a result of the 2008/09 financial crisis. During that 10-year span, the S&P 500 lost about 9% in total and that assumes dividends were being reinvested. If you were spending those dividends instead, and not reinvesting them, your return for those 10 years was -24%, almost three times as bad.
If an investor had a diversified portfolio of 60% total US stock market and 40% global bonds, their returns for this 10-year time period was 39% or 3.36% per year on average. Once again, a low-cost diversified 60/40 index fund ended one of the most difficult 10-year time periods in positive territory.
So, when you see a headline predicting investing disaster or the possibility of ‘a lost decade’, remember three points:
1. A lost decade is an extreme event that has only happened three times in history.
2. The headline has been written to gain as much readership as possible…and fear sells! These people do not have a crystal ball and cannot tell the future. Stanley Druckenmiller might be a billionaire investor, but he has been wrong in the past.
3. Read through the article and note that they are most likely referring to a prediction about one single asset class, and remind yourself that the stock market has always gone up in the long term. Make sure you have a globally diverse index fund portfolio that matches your unique goals, timelines, and risk capacity.
A headline suggesting a lost decade ahead does not mean that globally diversified investors will experience a decade of negative returns, or that we should stuff all of our money under the mattress, chase investments that sound too good to be true, or trash the plan that you worked so hard to put into place.
How likely is it that we are going to experience a lost decade?
Considering the U.S. has truly only had two lost decades in all of history, the odds are quite low. That does not mean it is not possible and that we shouldn’t be prepared for worst-case scenarios, but it’s a low-probability event, and it’s an even lower-probability event for globally diversified investors.
Should I sell my stocks and bonds?
The discussion about a lost decade is a media-driven dialogue – it is designed to create fear to sell newspapers. We have shown how a globally diversified portfolio changed the narrative, but also remember that this is referring to a relatively short period of time in investing terms, and 3 very specific extreme periods in history.
Over a long period of time, 20/30/40 years, the stock market has always gone up and there is no reason to assume that this time will be any different. The data below shows how the US stock market has delivered a return of 9.27% per year on average over a 40 year time period; Global bonds have returned an average of 4.77% per year. Despite numerous ups and downs, the overlying trend has been UP:
As a passive global low cost index investor, our belief or strategy is to ‘Buy and Hold’; over time with reinvested interest and dividends markets will rise. Equities and Bonds have always gone up in the long term even if the correlation between the two has shifted in the short term.
Right now, whether we are in Global Equity, Global Bonds, or a 60/40 mix, our portfolio has gone down in 2022, and our ‘fight or flight’ instinct wants to be doing something, anything, to limit the damage – but what are the options?
Remember, you only lose money if you sell when the market is down compared to when you bought in. If you had £10,000 in the Vanguard FTSE Global All Cap Index Fund on the 1st of January 2022 and sold now in October 22, you would get back just over £9,000.
Over the long term the global market always goes up - Buy and Hold.
You could switch everything into cash, get out of the markets and wait it out. This would crystalise a loss straight away, and with inflation running as high as it is, this is guaranteeing a real-term ongoing loss in buying power of that cash. You then have to make a decision about when to get back in – timing the market is notoriously difficult.
You could change the mix of your investments, but if everything is volatile right now, how exactly are you going to decide where to move to and what balance?
Bonds are down but gold is showing an increase – should you sell your bonds and buy gold?
This is the definition of selling low and buying high – exactly what we should be avoiding!
And if this doesn’t work, will you change again later - crytalising another loss?
Over the long term the global market always goes up - Buy and Hold.
If you are invested globally, you will not lose all of your money, because for that to happen, every company in every country in the world would have to fail, and if that happens we have got much bigger problems than the value of our investment fund!
Volatile Equities have historically provided bigger returns than more stable Bonds.
With a long time horizon for investing, you can afford to have a higher proportion of Equities and ride the ups and downs. As the time horizon gets shorter, it is best to move to more Bonds as you don’t want your portfolio to suddenly lose value just as you are about to spend it. If you are fearful and couldn’t stomach a 30% fall in your Equity portfolio, this is when an allocation in Bonds will help calm the nerves.
A sound asset allocation strategy ensures your investment portfolio is one you can hold without fear for the long term throughout market downturns.
Stick with the plan. Stop watching the news which is created to generate fear, switch off your fund-tracking app, and go and do something more enjoyable. Live life!
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