If your mutual fund investments are anything like those of the typical investor, you have probably suffered some fairly substantial losses over the last year.
Aside from the reasons for the downturn that you already know about (such as the economic slowdown, the difficulties of the dot.coms, and rising energy prices), there were probably some other "closer to home" reasons that your portfolio suffered.
By closer to home, I mean reasons that each of us could have actually exerted some degree of control over, as opposed to broad factors within the economy. Once such more personal factors affecting many of our investment decisions are identified, it becomes easier to decide how to proceed from here.
Here, then, are some of the often "invisible" factors that helped to contribute to the poor performance suffered by a great majority of investors:
The belief that certain trends of the prior few years would continue indefinitely into the future.
The belief in these trends became so deeply embedded in investors' psyches during the latter half of 1990's that many simply could no longer conceive of any different way for things to turn out other than "more great results". And as a consequence, investors acted as if these trends were indeed the way it forever would be:
Yet in fact, however, studies at the University of Chicago have shown that long-term "value" investing outperformed "growth" investing going all the way back to 1926! And although individual stocks have many advantages, they can be far more volatile than more diversified funds are, and are therefore, often best left to those who are not investing for the long haul.
Although stock funds do tend to outperform bond funds over long periods, the amount of outperformance is less than people generally think. (Indeed, two of our previously recommended bond funds, American Century Target Maturity 2015 and Vanguard Long-Term Treasury, currently have 5 yr. annualized returns of 11.13 and 9.17 thru 3-15-01. These returns are roughly in line with the current 5 yr. returns of several major fund categories, such as small and mid cap growth, small and mid cap blends, real estate, and foreign/international stock funds.) (Source: www.morningstar.com). And there have been periods over several straight years where bond funds have done even better as a group than stock funds.
We now can clearly see that this "New Economy" belief, widely bandied about prior to March of 2000, is clearly false. Technology stocks will indeed be highly sensitive to the ups and downs of the overall economy.
Good returns themselves generated too much complacency. However, much of the complacency also resulted from the generally favorable predictions and advice given by a large number of highly visible analysts and commentators.
In reality, many of the major cheerleaders for the equities market were and continue to be in the employ, one way or another, of the overall securities mega-industry. As a result, either deliberately or not, it has been difficult if not impossible, for the majority of these "experts" to align themselves against their own sources of income when making their supposed objective stock forecasts. (This has recently been widely covered in numerous media reports.)
There is the tendency among many mutual fund investors to believe that the stock market is essentially a single monolithic entity, either doing well or doing poorly.
One result of this belief has been the failure to seek out "pockets of opportunity" within an otherwise poorly acting overall market environment. Given such a belief, even if beginning a year ago, you correctly foresaw that the "market" had topped and moved quickly to get out, you would have probably missed out on the fact that many value funds were essentially dirt cheap. In fact, during the year ending this Mar 9th, while the median large growth fund was down 31.8%, the median value fund was up between 15.4% and 32.2% depending on the market cap of the fund. (Source: Morningstar as reported in The New York Times.)
Incidentally, in our Newsletter of Apr 1, 2000, we spoke highly of the potential for value funds as well as real estate funds, the latter which are up a median 31.8% in the year ending this Mar 9. Please e-mail me and I'll send you a copy of this back issue so you can see for yourself what we said back then.
There was a fairly widespread perception among many mutual fund investors that even if you did not take the time to research your investments or keep up with ever-changing economic conditions, you could still expect to do exceptionally well with your investments. There appear to have been several attitudes that helped to sustain this belief:
Can any of these beliefs, attitudes, behaviors, or lack of preparation be modified in the interest of preventing future mistakes? In an investing "culture" that tends to promote many half-truths and the all too frequent tendency to follow the crowd, going against these factors can certainly be difficult. And avoiding losses within the current type of market environment is virtually impossible since if you attempt to get out, you will basically be going against your goal to be a long-term investor. However, many people can and do steer their way through. And even if you don't feel you have the time/resources to do what might be necessary, you at least are availing yourself of information such as contained in these bi-monthly Newsletters to help you in that regard.
Once we recognize these relatively "controllable" ways in which we can contribute to our own fate as an investor, we can begin to make changes from here on out. Although the past never plays itself out in exactly the same ways in the future, knowledge of such controllable factors can help to prevent such distortions from creeping into our future decision-making.
Tom Madell, PhD
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