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In investing, a lot depends on when you take the snapshot. Different windows of time tell different investing stories. So, with that in mind, I took a look back at the last decade of fund investing to see what key lessons we can glean from this particular ten-year window and how these takeaways might help fund investors get ahead in the coming years.
1. U.S. stocks were the place to be
Back in 2009, U.S. stocks were finishing a “lost decade,” while emerging markets, specifically the BRIC economies (an acronym for Brazil, Russia, India and China), were bringing in spectacular returns. As the New York Times reported on December 29, 2009, “While the broad American market lost about a fifth of its value in the last ten years, emerging markets like Brazil, Russia, China and India powered ahead with gains in the double or even triple digits.”
Many expected that foreign trend to continue, but instead U.S. stocks came into favor and stayed in favor. For the ten years ending December 31, 2019, emerging markets were up about 2% annually, while the S&P 500 soared an annualized 13%.
The takeaway: The next decade will probably be different from the last one, so make sure you have a global strategy that can help you adapt when markets inevitably change.
2. Tech stocks bounced back
If you just started investing in the last few years, you might assume that tech stocks are always a good long-term investment. But investors who experienced the 2000-2002 bear market know that owning tech at the wrong time can have a lasting impact on your results.
Remember that ten years ago, the tech-heavy Nasdaq Composite Index still hadn’t yet recovered from the 2000-2002 tech bust when it lost about 80%. It ultimately took 15 years for the index to surpass its March 2000 high, and by then, some investors had sworn off tech stocks indefinitely. But if you avoided tech because you’d been burned in the early 2000s, you missed out on some big gains in the last decade. The Nasdaq Composite returned nearly 16% annualized over the last ten years, outpacing the S&P 500.
The takeaway: Stocks that have been out of favor for years often eventually come back. Foreign and value funds, for example, haven’t kept up with U.S. growth funds over the past ten years, but they could turn out to provide good investment opportunities in the coming years.
3. Investors favored ETFs and index investing
When large-cap growth leads, as it has for much of the past decade, index funds shine, partly because most indexes are market-cap weighted. Index investing became increasingly popular over the past decade. In 2019, there were more assets invested in index stock funds than actively managed stock funds.
Investors often got their index exposure through exchange traded funds (ETFs). A decade ago, there were around 700 ETFs, according to the Investment Company Institute; by 2019 there were about 1,600.
The takeaway: Don’t limit yourself to only active or only index funds. Invest in the funds that are doing best now, and that’s usually a combination of actively managed funds and ETFs.
4. Fund investors faced fewer trading restrictions
It became easier to trade funds over the decade as most brokers and fund companies loosened their trading restrictions. Back in 2009, Vanguard, Fidelity and TD Ameritrade all required investors to hold funds a minimum of 180 days to avoid a redemption fee. Today, most brokers have shortened that to a 60-90 day holding period. (TD Ameritrade still has a 180-day redemption period, but that could change now that Schwab is buying TD Ameritrade.) This year, most major brokers also eliminated trading commissions for ETFs.
Many funds dropped their redemption fees as well. The number of the NoLoad FundX Class 3 funds with redemption fees fell from 25% in 2009 to just 7% today.
The takeaway: With more choices and fewer limits on trading, investors can end up trading too frequently. It pays to have a system that helps you avoid making emotional investment decisions.
