The 1980’s and 1990’s were a great time to invest in the U.S. stock market.  The S&P 500 index had annualized returns of 17.9% over those two decades.  Theoretically, each $1 invested in the S&P 500 Index at the start of 1980 was worth more than $26 and the end of 1999.  It was the greatest stock bull run in U.S. history.

It became embedded in our culture that stock investing was the tried-and-true way to retirement riches.  Research on past stock returns seemed to confirm that, as long as you had a long time horizon, stocks really were the investment of choice.  The following type of chart became popular, sending a clear message that long-term investors weren’t going to meaningfully grow their wealth without stocks.

Source: Ibbotson Associates

We refer to this as “The Chart that Launched a Thousand Aggressive Investing Strategies”.

Projecting their past experience, many investors began to count on their stock investments to produce consistently high returns.  Some investors questioned the need for any conservative investments such as bonds in their portfolios.  Who wanted a bond yielding 7-8% when stocks were doubling that or better almost every year?

The concept of risk had been limited to short time frames only.  Sure, the stock market would go down from time to time, but it always bounced back and was hitting new highs a few months later.  The idea that stocks remain risky over longer time periods was out of style.

In short, investors came to view stocks as return-generating vehicles, not as a tradeoff between risk and return.

And then the bubble burst.

Starting with the collapse in technology stocks in 2000 and ending with a credit crisis in 2008, investors have re-learned what risk means in stock investing.  The theoretical $1 invested in the S&P 500 Index at the start of 2000 was only worth $0.91 at the end of 2009, a devastating blow to those who came to rely on ever-expanding portfolio values.

After any period of poor stock market performance, you will find many arguments that “equities are dead” and no longer good investments.  We do not agree.  Equities play an important role in a long-term investment strategy, but we must recognize that there are environments in which equities do not do well.  However, there are other assets that may perform well even when stocks are not.  Including these assets in a portfolio may reduce the downside potential in the short run, without abandoning growth opportunities in the long run.

Today, investors are looking to balance the goal of long-term portfolio growth while acknowledging the risks in the economy.  Check out Part 1 of our video, “Rethink Investment Risk”, for a further look at the risks of stock investing.

* Past performance is not a guarantee of future results.
* Note: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.   It is not possible to invest directly in an index.
* Investing in stocks is subject to fluctuation such that, upon sale, shares may be worth more or less than the original cost.
* There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not ensure against market risk.