A Lost Decade...Really?

Too often, whether by tv, radio or in print, we are told that we have just experienced the lost decade in the stock market. I have grown tired of hearing this and strive to prove that with a properly diversified and structured portfolio, this statement is an outright lie. Unfortunately though, for too many, this statement actually may ring true when they look at their portfolio. That is because most "financial advisors" in our industry fail to recognize the science behind investing and the proper way to avoid unnecessary risks.

Let's take a look at the graph below.



This actually shows the return of the S&P 500, which consists mainly of large company stocks, from January 1, 2000 - December 31, 2010. If your portfolio manager is like most and tracking the S&P 500, then yes, you may have experienced a lost decade.

However, if you follow the fundamentals of investing and have built a properly diversified and allocated portfolio, you would have fared much better. Below is the same chart but compared to two portfolios structurally allocated along all the major asset classes (domestic, international, emerging, large company, small company, value, fixed income, etc).



As you see, there isn't any substitution for sound advice and proper investing. Both balanced strategies had total returns over 100%*. Unfortunately, too many of the investing public, along with their well intentioned advisors, fall prey to the noise of the financial media and market prognosticators. If there is anything to learn from this, it is that financial science provides powerful guidelines on how to seek a successful investment experience which is derived by diversification, portfolio structure, maintaining discipline and awareness, and the reduction of frictions (costs and taxes).

Diversification neither guarantees a profit nor prevents a loss. S&P 500 Index copyright (c) 2010 by Standard & Poor's Financial Services LLC, All rights reserved. Index is not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

*Source for DFA Strategies: Dimensional Fund Advisors. Contact Arcon Wealth Management, LLC for how to obtain complete information on performance, investment objectives, risks, advisory fees and expenses of Dimensional's funds. Performance data represents past performance and does not predict future performance.

Timing the Market Timers

New York Times columnist Jeff Sommer, acknowledging recently that he found himself in a "buoyant mood" due to the steady rise in stock prices, sought out someone with a gloomier assessment of the financial markets to provide a counterweight to what he feared could be excessive optimism.

He turned to Robert Prechter, a veteran market analyst who has published The Elliott Wave Theorist in Gainesville, Georgia, since 1979. As Mr. Sommer reported last week in the Times, Mr. Prechter's investment outlook is "as bleak as an ice storm." Based on his interpretation of cyclical wave patterns that he discerns in both financial markets and "social moods," Mr. Prechter believes the current rally is only a minor upswing within a much larger, longer, and punishing downtrend that will "lead the unwary to ruin."

Market forecasters are often accused of doubletalk, couching their predictions in such convoluted language that they can later claim success regardless of the outcome. At least there is little doubt where Mr. Prechter stands—he sees disaster ahead and has been saying so for quite a long time.

In an earlier interview with the New York Times in July 2010, Mr. Prechter suggested the US stock market had entered a decline of "staggering proportions" that would likely see the Dow Jones Industrial Average—9686 at the time—fall well below 1000 over the next five or six years. Although the Dow has surged over 27% since that time to close at 12391 on February 18, Mr. Prechter is unperturbed and argues that the outlook is "much more dangerous today than it was last summer."

Perhaps Mr. Prechter will be proven right. But if not, he appears to have ample reserves of both patience and conviction. If his grim vision of deflation and depression sounds familiar, it should—he was making similar arguments in his book At the Crest of the Tidal Wave, first published in 1995.

Mr. Prechter has made some prescient market calls in the past—notably in the 1982–1987 bull market—but success since that time has proved more elusive. If only we could determine when to follow the advice of a market soothsayer and when to ignore it, we could be exponentially wealthier. But timing the market timers appears to be no easier than timing the market itself.

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Jeff Sommer. "Writing 'Danger' in Ever-Larger Letters," New York Times, February 20, 2011.

Jeff Sommer. "A Market Forecast That Says 'Take Cover'" New York Times, July 3, 2010.

Robert R. Prechter Jr., At the Crest of the Tidal Wave (Gainesville, GA: New Classics Library, 1995).