As we say goodbye to 2010, we look ahead to 2011. We hope for global economic stabilization and an improving job market, but we need to pause and give thanks. We should be thankful for a wonderful couple of years in the stock market. Yes, that’s right….I said we should be thankful for the last two years. Did you know that the total combined return of the S&P 500 for the last two years is almost 42%….26.47% in 2009 and 15.46% in 2010. Those are impressive returns.
The most impressive fact about these numbers is that most people have no idea how strong the market has been. Where are the trumpets announcing the close of another successful year? Where are the media leaders shouting the good news? Unfortunately, you won’t find it. Good news doesn’t sell like bad news. Remember the close of 2008? The S&P 500 closed down 37%. Ouch, it was painful for all of us, and we certainly knew because everywhere we turned we heard, quite loudly, the bad news.
We can’t control what is touted to the general public, but we can control what we filter and what we ingest from an informational standpoint. This is good news! We should stick it in our back pockets and hold onto it. How long did we walk around with our chins down living in fear that the sky was falling during late 2008? Well now’s the time to shine. Pick your heads up and be thankful for participating in the stock market.
There is a point to my commentary, and the point is the markets work. The stock market is a great tool when used correctly. Some folks feel they are smarter than the market and try to time buys and sells. These folks usually get whipsawed and end up on the bad side of market returns. Those who chose to follow sage advice and stay committed to the market were rewarded for their patience. Those who took things even further and made the decision to continue to dollar cost average (buy consistent amounts at regular intervals) where rewarded even further.
With two great years behind us, how does this position the markets for 2011? Unfortunately (or fortunately if you are wise) ,you won’t find a prognostication here. I have no idea which way the market will travel through this New Year. I am certain of this: investors should stay committed to prudent investment philosophies, such as diversification, rebalancing, dollar cost averaging, and tax efficient investing. These strategies win in the long run. Simple math proves this to be true. The returns of the S&P 500 over the last 16 years (1995-2010) produced an average return of 10.66% a year. Pull out any one year individually and you will find a high to low range from 37.58% (1995) to -37.00% (2008), but it’s not about the outliers. It’s not a sprint: It’s a marathon. It’s the commitment to the long term approach that wins in the end.
We have said our goodbyes to 2010. We sang, “Should old acquaintance be forgot and never brought to mind.” But I say we don’t forget. I say we learn from the past and be thankful for financial wisdom that served us well.