During a bear market investors should go for a more simplistic view
One look at the early-2002 performance of stock mutual funds makes you glad fund investing is strictly a long-term proposition.
Nobody is getting rich short-term in any category of domestic stock funds ' small, medium, or large-cap funds, growth, value or blend. As of mid-February the only variation is in the size of the year-to-date loss.
This is no fun for investors who learned in the 1990s to discriminate among 'styles' of stocks. The way to be hip with your stock funds was to figure out which sector of the market would attract the hot money next.
These days there is no game. Stocks of all sorts are just sitting around waiting for a spark to get the action going again.
That makes it hard for amateur investors ' people managing only their own money, in many cases without extensive day-in, day-out experience ' to decide what, if any, investment style suits them best. If you are in that position, here is a consoling thought: over long periods of time, it may matter less than you think which style you go with.
I say this having just taken a past-performance reading on my Bloomberg indices representing four broad sub-divisions of the US stock market. By adjusting the start and end dates I can manipulate data like this in many ways to buttress my argument ' and so can anybody else, a point to remember whenever you hear partisans making an oh-so-compelling case for their favourite style in stocks.
To stake some claim to objectivity, I looked at annual returns as far back as they happen to go in the Bloomberg, which extends to when the indices were established, or before. That took me to 1978, in the case of the Russell 1000 Index (large stocks) and the Russell 2000 Index (smaller stocks). The starting point was 1974 in the case of the S&P Barra Growth Index and the S&P Barra Value Index, which divide the stocks that make up the Standard & Poor's 500 Index between those with higher price-to-book-value ratios, denoting 'growth', and lower ratios, denoting 'value.'
Here are the compound annual returns I found, to two decimal places: Russell 2000, 11.42%; Russell 1000, 11.29%; S&P Barra Growth, 11.05%; S&P Barra Value, 10.75%.
Are the tiny distances between any two of these market gauges worth bothering about? Not to my eye. The kind of stocks you owned over the past 20 to 30 years quite evidently was a minor matter compared to the question of whether you owned stocks or not.
We cannot take these numbers and blithely extrapolate them into the future. Though the past may be prologue, the future does not take orders from it. For all I can tell, large value or small growth or who knows what else is about to embark on an extended period of superior performance, leaving the others in the dust.
The charts are a good bet to diverge dramatically over short intervals. Growth ran circles around value for a memorable stretch in the late '90s; then value came back and beat the stuffing out of growth.
In professional money-management circles, this wave action brought a rude end to more than a few distinguished careers. It need not cause nearly as much trouble, though, for individual investors who have the luxury of patience, answering only to themselves.
They do not have to measure up this quarter or next, and they have no index or peer-group 'bogey' they must beat. Unless you have some personal reason to prefer one sector or another, you can adopt an answer to the style mystery that requires no clairvoyance whatsoever. You spread your money around equally among all sectors. Your simple mission statement runs something like this: 'The global economy will almost certainly be a lot larger 10 years from now,' as Eric Kobren says in his newsletter FundsNet Insight.
'We want to share in this economic growth.'
Bull markets are times for developing refinements in investing, ideas like style. As long as the market is rising, these distinctions are interesting and give us a sense of increasing sophistication.
Bear markets are times for stripping these refinements down again and asking whether we are using them right. At low ebbs like now, investors are pushed and prodded into going back to basics, revisiting the virtues of simplicity.
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