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Market Review for the Past Decade (Part 2)


Readers of our previous blog post have contacted us and asked what an investor could do to address market volatility, even in a 10-year period as benign as the past decade. Some readers even asked “Marc, isn’t there a silver bullet that can erase all of the market volatility while at the same time preserving annual growth rates as high as the growth rates we have observed in the past decade?” The short answer to this question is “No, there is no magic bullet which eliminated volatility in your portfolio entirely”. But, that does not mean that you, as an informed investor, would not be able to mitigate the rollercoaster ride of daily/monthly/quarterly/yearly market volatility. We are, of course, talking about global diversification across all markets and asset classes as the best solution to keep portfolio volatility as low as possible.

Investors who committed to global diversification and who built evidence-based portfolios by overweighting areas of the market associated with academically-proven higher returns—like small-cap stocks and value stocks (i.e., stocks trading at low relative prices)—were challenged over the past decade. As shown in Exhibit 3 below, during the 2000s, investors were rewarded for holding emerging markets stocks and developed markets outside of US stocks. During the 2010s, however, the US market outperformed developed ex-US and emerging markets.

Additionally, the performance of value stocks vs. growth stocks (i.e., stocks trading at high relative prices), and small vs. large cap stocks, also varied enormously during the past two decades.

Small cap and value stocks outperformed large cap and growth stocks in the 2000s across all markets, while the 2010s produced mixed outcomes. Small caps underperformed large caps in the US and emerging markets but outperformed in the developed ex-US market. Value underperformed growth in all three market regions. Despite underperforming large cap and growth in the US, small cap and value delivered 11.83% and 11.71%, respectively, for the decade.

Exhibit 4 below shows the cumulative investment experience over both decades, with small cap and value stocks outperforming large cap and growth stocks, respectively, across the US, developed ex US, and emerging markets. The annualized 20-year returns illustrate how diversification helps investors ride out the extremes to pursue a positive longer-term outcome.


So what should you do as an investor looking forward? Diversify across academically-proven expected dimensions of market return The deliberations above bring us to now—February 2020. Stocks and bonds in the US, and in many other developed markets and emerging markets, logged strong returns last year and even in the past decade.

The US bull market is 10 years old, and current headlines can give investors other reasons to worry about the future—for example, a pushback on globalization, the effects of climate change, the limits of monetary policy, the fate of Brexit, the vagaries of the 2020 US presidential race and the most recent outbreak of the new coronavirus COVID-19. And these are only the potential areas of crisis we are currently aware of. Looking ahead, who can say what the next decade will bring? The only certainty is the decade will have its own set of surprises.

Here’s what we can learn from the past decade (and all the others that came before it): Despite all the change and uncertainty in each individual decade, the fundamentals of successful investing remained always the same: Investors need to diversify across markets and asset groups to manage risks and pursue higher expected returns. Stay disciplined and maintain a long-term perspective! Take the daily news as a mere daily commentary to the market theatre and avoid reactive investment decisions based on fear or anxiety. Don’t try to predict future performance or time the markets. Instead, develop a sensible investment plan based on a strong academic philosophy, implementing a value-tilt, a small-cap tilt and a profitability tilt in the equity portion of your portfolio and controlling term-risk and credit-risk in your bond portion, just as we had outlined in the summer of 2017: https://www.marcikelsconsulting.com/post/2017/05/29/it-is-best-to-be-a-random-walker https://www.marcikelsconsulting.com/post/2017/06/05/scientific-investing-ii-the-smart-academic-egg-heads https://www.marcikelsconsulting.com/post/2017/06/12/scientific-investing-iii-peanut-butter-spread-or-term-and-credit-spread https://www.marcikelsconsulting.com/post/2017/09/06/scientific-investing-iv-putting-it-all-together

Most importantly: stick with these investing principles for your investment lifetime, after all, these have been substantiated by the insights of Nobel Laureates who have verified the existence of these dimensions of market returns going back to 1926.


Investors who follow these principles have a better financial journey in any decade.

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