Key #1
The question most people have is how do you maximize your investment opportunities without suffering through the severe volatility of the market? One way would certainly be to look at the year ahead, try to pick the best performing assets and hope to achieve favorable returns. However, in any given year, nobody can predict which asset class will be favored and which will perform poorly.
Recognize that it's time invested in the market, not timing your investments that makes the difference. Nobody knows what investments will increase or decrease from year-to-year; however, investment categories have historic long-term trends.
Can You Guess Which Asset Class Will Perform Best in 2003?
Take a quick look at the chart below:
| Year |
Large Cap Stocks |
Small Cap Stocks |
International Stocks |
Bonds |
Cash Equivalents |
| 1983 |
22% |
29% |
24% |
8% |
9% |
| 1984 |
6% |
-7% |
7% |
15% |
10% |
| 1985 |
32% |
31% |
56% |
21% |
8% |
| 1986 |
19% |
6% |
69% |
16% |
6% |
| 1987 |
5% |
-9% |
25% |
2% |
5% |
| 1988 |
17% |
25% |
28% |
8% |
6% |
| 1989 |
32% |
16% |
11% |
14% |
8% |
| 1990 |
-3% |
-20% |
-23% |
8% |
8% |
| 1991 |
31% |
46% |
12% |
16% |
6% |
| 1992 |
8% |
19% |
-12% |
8% |
4% |
| 1993 |
10% |
19% |
33% |
11% |
3% |
| 1994 |
1% |
-2% |
8% |
-4% |
4% |
| 1995 |
37% |
28% |
11% |
19% |
6% |
| 1996 |
23% |
17% |
6% |
3% |
5% |
| 1997 |
33% |
22% |
2% |
10% |
5% |
| 1998 |
29% |
-3% |
20% |
9% |
5% |
| 1999 |
21% |
21% |
27% |
-2% |
5% |
| 2000 |
-9% |
-3% |
-14% |
12% |
6% |
| 2001 |
-12% |
2% |
-21% |
9% |
4% |
| 2002 |
-22% |
-21% |
-16% |
11% |
2% |
| 2003 |
? |
? |
? |
? |
? |
As you can see, from year-to-year, any given asset category can achieve the best investment performance or worst. For example, consider 1999. International stocks performed best with a 27% return while bonds suffered a -2% return. Whereas the following year international stocks trailed with a -14% return and bonds performed best with a 12% return—international stocks went from first to last and bonds from last to first.
Over time, all investments have good and bad years. Over long periods of time, however, stocks have historically provided higher returns than bonds or cash-equivalent investments (such as certificates of deposit and money market accounts) even though they have under-performed other asset classes for short periods. Consider the example below to see the opportunity you would have lost if you had based your investment decision on performance results for one year in the market.
Performance of a $100,000 Investment
A panoramic view (above) is better than a close-up (below) if you're a long-term investor.
In the latter example, it would be very natural to assume that bonds are a better investment. After all, a $100,000 investment in large-cap stocks in the year 1990 would have depreciated to $96,490 that year and a $100,000 invested in bonds during the same period of time would have appreciated to $108,290. Of course, if you take a broader view of the market, you'll see an entirely different story. Over a 20-year period beginning in 1983 and ending in 2002, a $100,000 investment in stocks would have appreciated to $1,088,919. In bonds, that same investment would have appreciated to $617,163. If you are a long-term investor, you can see how important it is to have a long-term investment strategy.
What you want out of a long-term investment strategy is to capture the performance of the best performing investments while minimizing the performance of the worst. Though on the surface this may sound like a foreboding task, there is a simple investment strategy known as asset allocation that can help you achieve your long-term investment goals. The savviest financial planners use this strategy, but every investor on any level can put it into practice.
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