By John Wasik
CHICAGO, Sept 17 Five years ago I was watching
the world financial system implode after the failure of Lehman
Brothers in real time. Since I'm largely a buy-and-hold
investor, I grimaced while my retirement savings took a
pummeling in 2008-2009.
What have we learned since that calamitous year? There were
certainly a few gut-wrenching surprises as well as some enduring
truths that still hold in personal investing for the future.
1. Gravity is stronger than diversification
For years, we adherents to the Modern Portfolio Theory of
diversification have practiced the fine art of blending our
portfolios with assets that don't typically move together. In
2008, many, including me, were surprised when commodities funds,
which were supposed to move in the opposite direction of stocks,
followed stocks into the abyss. When nearly everything declines
in a global meltdown, there are few safe havens.
In late 2008, worldwide demand for commodities also
plummeted. An exchange-traded fund like the PowerShares DB
Commodity Index Tracking Fund holds a variety of
commodities contracts from crude oil to zinc. The fund dropped
nearly 32 percent that year, nearly matching the 37-percent loss
of the S&P 500 stock index.
The fund remained a poor investment over the past five years
as global commodity demand is relatively sluggish and China and
India slowed down. It has fallen almost 5 percent annually, on
average, during that period through Sept. 13.
Long term, commodities may be a winner as the world
population grows, but short term, they are incredibly volatile
and not a good stock hedge.
2. Staying the course is no sin
I didn't bail out of stocks at the nadir of the market and
have since recovered all of my losses - and then some. The S&P
500 has averaged an 8-percent average return over the past five
If you just stayed in a plain-vanilla index fund like the
SPDR S&P 500 Index ETF over the past year, you'd be up
nearly 20 percent. For those who can handle the short-term
volatility of stocks, the long-term growth can be rewarding.
3. Boring bonds still make sense
Even with the current anxiety over the Fed's
widely-telegraphed, wind-down of its stimulus program - and
accompanying rising interest rates - owning bonds is still a
good idea, too.
Why? Because they are not stocks and a reliable hedge during
a stock-market meltdown. In 2008, a broad-based bond fund such
as the iShares Core Total US Bond Market ETF gained
nearly eight percent when stocks and most everything else got
creamed. Although the fund is down almost 3 percent over the
past year through Sept. 13, it's averaged just over 4 percent
over the past half-decade.
That's hardly impressive, but the low volatility and steady
returns are far better than sticking with commodities over that
stretch. I continue to own the iShares fund as a core holding.
4. Concentration can be a curse
Sometimes you can pick a single stock or sector, lady luck
smiles and it comes up a winner. And then everything can go
haywire. Housing started its steep decline prior to the Lehman
failure; funds like the iShares US Home Construction ETF
lost nearly 58 percent in 2007 and 42 percent in 2008.
Timing is everything, of course. For investors who bought at
the bottom, the fund has averaged a 23-percent return during the
past three years through Sept. 13, compared to 17 percent for
the S&P 500 index.
5. Don't invest in fear, invest in confidence
It's easy to think that traditional, hard assets are going
to protect your nest egg. Such was the thinking with gold, which
many regarded as a back-up currency when everything else looked
An exchange-traded fund like the SPDR Gold Shares ETF
, which holds bullion, was up about 5 percent in 2008 and
made money from 2009 through last year.
But as fears about the global economic system subsided in
recent years, so has the price of gold. The SPDR fund is off
more than 25 percent for the year through Sept. 13 and has
averaged less than 2 percent over the past three years.
You would have been much better off holding common stocks,
which pay dividends and have averaged more than 17 percent over
that same three years (if held in an S&P 500 Index fund).
While it's normal to be nervous about stocks, don't
overindulge in your fears and retreat from them entirely. Even
with a sluggish rebound, soaring corporate profits, low
inflation, rising home sales and continued low interest rates
are all positive drivers for the U.S. economy.
"It's not a broken recovery, it's just different," said Jim
Paulsen, chief investment strategist of Wells Capital
Management, speaking at the Chicago CFA Society on Sept. 10.
"It's different and should turn out to be okay. The biggest
stimulus is rising confidence."
The main lesson of the Lehman legacy is to craft a portfolio
plan based on how much you can afford to lose and forget about
projected returns. The future can be elusive, but the past
should be instructive.