The Doofus Decade Ahead for Mutual Fund Investors

by David Ning · 7 comments

This is a guest post from Neal Frankle, CFP, who regularly contributes to this blog on investment subjects.

Eventually the market is going to turn around.  Your funds will start going up in value.  But my guess is, even then, you’ll find it hard to stay motivated about investing.

The world is going to call you a doofus.

I say this because regardless of how the market behaves, the ten-year track records of mutual funds are going to start looking very ugly very soon.  In fact, its going to take a long time before those ten-year track records start to recover.  As a result, you’re going to feel like an idiot for investing.

What’s happening is that the strong positive returns of the fourth quarter of 1998 are dropping off the rolling ten-year performance numbers.  To make matters worse, the terrifying losses of the fourth quarter of 2008 are starting to roll in to those averages.  And if that weren’t bad enough, the great returns realized during the bull market of 1999 are going to be replaced by the horrific numbers of 2000, 2001 and 2002.

Expect to start seeing negative 10 year averages for most of the funds you own. When you see those results, you may start to think that stocks don’t pay to own.  Worse, you’ll see that bonds have a better 10 year average so you might (heaven forbid) plow into bonds.  But if you think about it, interest rates have nowhere to go but up and that usually spells trouble for bond investors.

How do you protect yourself from falling into this trap?

  1. Understand statistics.    It is generally accepted that the stock market returns vary from -30% to + 50%, 95% of the time.  So 2008 wasn’t typical but it wasn’t unprecedented.  The market only returned one negative year from 1982 through 1999 so we got spoiled.  Over the longer view, the market has a negative year once every four years.  You have to expect some bad years.  I guess you figured that out by now.
  2. Understand that we have just experienced (or are experiencing) something in the stock market that happened only 3 times in the last 80 years.  To expect this kind of pain to continue forever is not realistic.  To say that the market will never recover flies in the face of observable history.
  3. Don’t be a doofus.    If you had a bad year, or even a few bad years, that little voice inside you is going to be screaming that you should be more conservative with your investments.  That’s the worst time to make that kind of change.
  4. Get your decision time frame in line with your investment time frame.   Let’s say you have 20 years to invest.  Make the best decision on how to invest for that 20 year time frame and stick to it.  That doesn’t mean you don’t re-allocate the portfolio.  What it means is that you shouldn’t make a decision about how much risk to take based on how you feel that morning if you have another 20 years to go till retirement.

You can’t change what’s already happened to your portfolio.  The only thing you have control over is what you do next.  Re-establish your time horizon and ignore the reports you’re going to see about how terrible the stock market is.  These are the most important steps you can take to make sure you don’t become an investment doofus in the years ahead.

Have you abandoned your investment strategy?  Why or why not?

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{ read the comments below or add one }

  • Neal Frankle says:

    Great comments here. EPIC, your analogies really hit home.

  • epicview says:

    Your right on the money. Now, at the bottom of the market, everyone is panicking and disavowing stocks. The discussion at Frugaldad is whether it was better to take the money you would be putting in your 401/IRA and paying off your mortgate with it instead. But, the market is not designed to allow you to retire in 5 years, but in 35 years. Still, then you have the comment by @almost_there and you wonder if all the rules that you’ve been taught have changed. Its like trying to drive a car while looking a mile ahead down the road. Its fine when the road is straight. But when the rules change and you hit curves, it becomes almost impossible to figure out what the right move is.

  • My Life ROI says:

    Good outlook. I remember when I first started investing and I would look at items 10 year growth to determine which had a better track record.

    Oh how times have changed…

    I would bet a lot of people do that, though, so this is a very valuable post.

  • Neal Frankle says:

    Great questions/posts.

    What I was trying to say is that no matter how the market does, if you base your decisions on the Morningstar reports (which show 10year averages) you’ll feel like a doofus because the funds will show negative returns. I don’t in any way suggest that you shouldn’t be investing…its just that the world is going to tell you not to.

  • Epicview says:

    Lol. I was just asking this question over at Frugaldad.com. You’ve provide a-lot of the answers. Statistically, as a rule, the stock market should do alright in 10-30 years. What everyone is wondering now, is have all the rules changed? Here was my post at Frugaldad.

    Now, more than ever, when everybody is panicking and stopping their IRA/401 contributions and selling off their stocks, I wonder if dollar cost averaging really works.

    Here’s a question. If you bought your house at the top of the market for $300,000 and now its only worth $200,000 then it looks like a bad financial decision at first glance. Particularly if you had to sell it at the bottom. Fast forward ten years and the house is now worth $500,000 and now it looks like a good decision.

    Isn’t the stock market the same way? It only returns in 10, 20, 30 years. There will be dips in between. If you follow the latest fads and buy the hottest home building stocks, then sell and buy the hottest bank stocks, etc. then you run a huge risk. Stick to an index fund and leave it alone for ten years and, like the house, you should do alright.

    I wish I had a crystal ball to see how my 401 will look if I leave it alone for 5-10 years. Any thoughts on this?

  • Matt @ StupidCents says:

    I’m very optimistic with the funds I currently hold. Yes, they’ve lost value, but still ahead of their peers for the most part. Doofus or not, I think now is a great opportunity add to your investments for the long-term.

  • FFB says:

    I’m thinking this is the doofus age because it doesn’t take much thought to make a long-term killing now. If you can invest in broad indexed funds now, when they are their lowest in years, then you will see some great returns over the next ten+ years (well, I really hope so).

    Stocks are cheap now. Not that you should go play around and speculate but if you have a long-term view you can get in on the market while prices are lower than they have been in a looong time.

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