Being a portfolio manager in the 80s and 90s was easy. The chart below shows how well investors in stock and bond markets fared in the 80s and 90s. Everyone knows what a disaster being a stock investor was in the late 60s and 70s. That was the first secular bear market since the Great Depression. In 1966 the Dow Jones was hovering around 1,000. In 1982, it was still there, hovering around 1,000. After adjusting for inflation, the results were even more disastrous. The early 80s saw Time magazine quoting “The Death of Equities” and other similar headlines (great contrarian indicator in retrospect). This of course coincided with the start of one of the greatest bull markets of the 20th century, as equity markets bottomed in 1982 and staged one of the greatest rallies on record.
From 1982 until 1999, US equity markets suffered only 1 negative year! And that is factoring in Black Monday – the one day market correction of over 20%! The average annual return for US stock markets during this period (total return) was 18.6%. Even being conservatively positioned in bonds, investors saw great returns. The Lehman Aggregate returned 9.5% average annual returns during the same period. Like I said, being a portfolio manager in these years was easy.
The Good Times: Stocks (black) versus Bonds (amber) in the 80s and 90s
The current decade was another story. Since January of 2000 (through November 2009), Equity investors are still underwater even factoring in dividends. The annualized return during this period is -1.5%, or a total loss of -14.3%. How have bonds fared? Far worse than the previous two decades, but still a respectable 6.5%. This has been one of the most trying times in recent memory for any investor. When looked at from a longer term perspective it is clear we entered another secular bear market some time in early 2000, and as history has shown, these can go on for many more years than investors are ready for. And just when you are ready to throw in the towel, a new bull market is born.
The Bad Times: Stocks (black) versus Bonds (amber) since 2000
For the time being however, it is clear that Buy and Hold is a disastrous investment strategy in a secular bear market. Investors will be rewarded for being dynamic, not static. Keeping a global perspective on investment opportunities and not having a dogmatic approach both to asset allocation (the mix to stocks, bonds, commodities) will aid portfolio managers who need to generate alpha over the coming years. Now is a time when portfolio managers will earn their salaries!