What? Me Worry?

Michael L. Gay, MBA, CFP®

During the past decade, investors had an awful lot to worry about. 

From the aftershocks of the 9/11 terrorist attack and an ongoing war in the Middle East, to an unprecedented rise in oil and gas prices, investors had little in the way of good news to think about.

……not to mention:

  • the most severe financial crisis in our history (which included a 46% decline in stock prices)
  • a historic collapse in housing prices
  • a sovereign government that was so incapable of making sensible financial decisions that its debt was downgraded
  • historic U.S. federal deficits

And today, heading into 2013, things are no different.  The media has peppered us with headlines of a looming “fiscal cliff” and the related possibilities of large tax increases, massive cuts in federal spending, and a subsequent recession. 

…..not to mention:

  • the possibility of war or a potential nuclear event with Iran
  • the potential of increased inflation caused by the Federal Reserve’s stimulus programs
  • the reality of an ongoing financial crisis at home and in Europe
  • repeated warnings from the financial press of an inevitable collapse in the dollar

And, once again, investors have little in the way of good news to think about.

Which makes me think that the next decade may very well be just like the last one.  Which is to say:

A very good decade for passive investors. 

You see, despite all the crises, despite all the worrisome possibilities, and despite all the “risk on, risk off” talking points raised by Wall Street and its agents in the media, investors who managed to ignore all the noise fared quite well.

Because during the past decade (the 10 years ending 8/31/2012), an investor who held a simple buy-and-hold portfolio of 10 common asset classes earned an average annual return of 10.8%.  That’s a 160% increase in wealth during what was arguably one of the most volatile decades since World War II.

And all that was required of investors was a bit of discipline.  The discipline to create a goals-based allocation and stick with it through thick and thin, ignoring (or, at least, not acting upon) pretty much everything reported by Wall Street and its agents in the media.

So the next time you are tempted change your portfolio based on the latest bit of commentary about the “fiscal cliff” or who won the election (or any other bit of headline news), take a deep breath and remind yourself that living with market volatility is the price we pay for earning the return we need to achieve our most important financial goals. 

Such is the nature of risk.  And without risk there would be no reward.