Past decade was traumatic for investors

The past decade, the first for InvestmentNews, has been a traumatic one for investors. It was a decade that saw two -bubbles burst, a terrorist attack that virtually shut down the economy for a week, two continuing wars, new market highs followed by significant declines, low interest rates and high commodity prices, low inflation and the apparent rebirth of inflation.

It saw the dramatic rise of the Chinese economy and the equally dramatic rise and partial fall of the Chinese stock market.

It saw huge growth in mutual fund assets and the development of exchange traded funds as competitive investment vehicles.

It saw the explosive growth of hedge funds for institutional and high-net-worth individuals and tentative moves to make them available to less-wealthy investors.

There were dramatic development in quantitative-investment approaches and the development of derivative securities. Some of these derivatives — poorly designed, poorly rated and poorly monitored by regulators — contributed to the problems that popped the housing bubble.

Financial planners and investment advisers became increasingly sophisticated, and there was dramatic growth in the number of independent investment advisers. There was also a major increase in the number of individual investors as 401(k) and other defined contribution plans blossomed and their assets surged.

It also was a decade that reinforced vital lessons for financial planners, investment advisers and their clients.

The first lesson is a reminder of how resilient the U.S. economy is. The bursting of the technology bubble followed by the attacks of Sept. 11, 2001, which severely disrupted business for a week, only pushed the economy into a relatively mild recession.

RISING MARKET

The second lesson is that assuming a rising market will continue to rise is a dangerous assumption, whether it be the U.S. stock market, the U.S. bond market, the Chinese market or the U.S. housing market.

Newton’s first law of motion, that bodies in motion continue in motion unless acted upon by a force, applies to the stock market, even if those forces sometimes appear difficult to discern.

The third lesson is that it is difficult to know when some outside force will act to slow a bull market. Many sophisticated investors were caught fully invested in stocks when the tech bubble burst and again when the housing bubble burst.

A fourth lesson is that it is never safe to assume that inflation is dead. Even the Federal Reserve Board, despite its best intentions, finds it difficult to drive a stake into inflation’s heart.

DIVERSIFIED PORTFOLIO

Therefore, a carefully diversified portfolio using all available investment vehicles, such as U.S. stocks and bonds (including Treasury inflation-protected securities), international securities, commodities and real estate, is essential for successful investing over the long term.

The next decade may well be as economically volatile as the past one has been, but probably in different ways. Nevertheless, the lessons of the past decade should inform the decisions of investment advisers and clients in the next decade.

InvestmentNews will continue to report on the developments in the economy and the markets, the results of the decisions made by advisers and their clients, and the business of providing investment guidance to individuals in the next decade without fear or favor, as it has in the past.