How investors can avoid another 'lost decade'

Gold has been the star performer of the decade 

By Emma Simon

12:01PM BST 18 Aug 2011

2 Comments

The past decade has been a grim one for investors, with stock markets failing to regain the peaks seen back at the turn of the Millennium, at the height of the dotcom boom.

For pension savers, Isa investors and those with long-term savings, the market movements over the past week have mirrored the peaks and troughs seen over the past decade – with a couple of years of strong gains disappearing as the bull run fell into another punishing and protracted fall.

This "lost decade" has coincided with a period when individuals are increasingly having to make their own long-term savings, be it for pensions, funding their children's university fees or helping them get a start on the housing ladder.

This has been a particular disaster for those fast heading towards retirement, who are simply running out of time to make up lost ground. At the same time they have been hit by a double whammy of lower interest rates – meaning "safer" assets such as cash are losing value in real terms – and falling annuity rates. As a result, over the past five years many have been forced to retire on far smaller pensions than they imagined.

However, it is not all doom and gloom. For all the talk of the "lost decade" there are a number of assets, sectors and funds that have delivered strong returns during this period.

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Below we look at where the smart money has gone in recent years, and assess each area's chances of outperforming in the decade ahead.

GOLD

This has been the star performer of the decade, rising in value by 606pc since the stock market peaked in 1999. Those canny enough to have bought a few gold bars as the stock market started to slip in 2000 are now sitting on substantial gains.

Other metals, such as copper, silver and platinum, have also risen in value, as have oil and agricultural commodities such as corn and coffee. Not surprisingly, funds that invest in gold and commodities have seen even more stellar gains: BlackRock Gold & General has risen by 768pc over the past 10 years, while JP Morgan Natural Resources is 610pc higher.

As long as equity markets remain in turmoil the price of gold is likely to remain high – but most experts warn that at some point there will be a sharp correction. Commodity prices, though, continue to be fuelled by demand from rapidly industrialising emerging markets, in particular China, India, Brazil and Russia.

EMERGING MARKETS

In times of market volatility share price falls can be more dramatic in these emerging economies. Over the "lost decade", though, investors have seen a positive return on their money – although much will depend of course on where and when you were invested.

Since the end of 1999 the MSCI Emerging Markets index has delivered a total return of 163pc, compared with a FTSE 100 return of just 6.72pc (this is positive only because of dividend payments) and a return of 4.78pc from the MSCI World index.

However, many funds investing in this area have done far better than the index. Henderson China Opportunities has risen by 313pc over the period. First State Global Emerging Markets, managed for most of the period by Angus Tulloch, is up by 320pc over the past 10 years, while the Indian Nifty index (its 50 biggest companies) has grown by 551pc over the past decade.

Given the demographics of the region and its potential for growth, most experts agree that it has the potential to deliver returns in future. However, markets can be volatile, so investors are often warned to bank gains after periods of strong growth, perhaps using profits to invest in other undervalued assets.

PROPERTY

Given that house prices are on the slide again, property might not feel like a particularly robust investment. But the figures show that over the past decade it has remained one of the top performing assets. Based on the Halifax Property Price Index, home owners have seen a return of 101pc on bricks and mortar since the end of 1999.

Of course there will be huge regional variations within these figures – and the vast majority of us borrow to buy our homes, so clearly have interest charges to factor in to any notional "return". And we still do need a roof over our heads: it's not as if we can cash it all in and go and live in an Isa. However, this doesn't detract from the fact that when it comes to long-term saving and retirement planning people shouldn't overlook their property.

FUNDS

Even though the UK stock market has not regained its previous highs, this doesn't mean that funds investing in British shares haven't made money over this period. Dividend income remains an important part of the total return on pensions and Isas. In addition, most fund managers won't slavishly follow an index but will be looking to invest in companies whose share price will rise faster than peers in a rising market, but won't fall like a stone when things head south.

Special situation funds, for example, try to find undervalued companies with the potential to deliver gains and good managers in this sector are among the top performers. Marlborough Special Situations has delivered a 289pc return over 10 years; Fidelity Special Situations has returned 101pc.

Another notable success story has been Neil Woodford's Invesco Perpetual High Income fund, one of the biggest and most popular unit trusts. This defensive fund, which concentrates on stocks that have the potential to deliver a rising dividend stream as well as capital growth, has returned 120pc over the past 10 years – hardly a lost decade for the thousands of private investors who have entrusted their long-term savings to this fund manager.

http://www.telegraph.co.uk/finance/personalfinance/investing/8698481/How-investors-can-avoid-another-lost-decade.html

A Lost Decade for U.S. Stocks

Dec 23, 2009

I came across two charts that show the dismal performance of U.S. equities in this decade. The first chart below is from the Numbers column in the latest issue of Bloomberg Businessweek. It shows the return of the S&P 500 Index from Dec 31, 1999 through Dec. 14, 2009. The S&P 500 lost 23% in this period. During the same period market indices in developed countries like France, Finland, etc. showed relatively better performance. The main stock market indices in the Netherlands, Japan and Greece performed worse than the S&P 500.

It is interesting to note that while the S&P lost 23%, the Brazilian Bovespa Index gained an astonishing 318% during the same time frame. This is one reason why US investors should look beyond the US for better returns.

click to enlarge

Source: Bloomberg BusinessWeek

The second chart is from a Wall Street Journal December 20th article titled “Investors Hope the ’10s Beat the ‘00“. From the article:

“The U.S. stock market is wrapping up what is likely to be its worst decade ever.

In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.

Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.

The period has provided a lesson for ordinary Americans who used stocks as their primary way of saving for retirement.

Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s—when a 17.6% average annual gain made it the second-best decade in history behind the 1950s—stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of financial panic like 2008, stocks were a terrible place to invest.

With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann. He estimates it would take a 3.6% rise between now and year end for the decade to come in better than the 0.2% decline suffered by stocks during the Depression years of the 1930s.

The past decade also well underperformed other decades with major financial panics, such as in 1907 and 1893.

“The last 10 years have been a nightmare, really poor,” for U.S. stocks, said Michele Gambera, chief economist at Ibbotson Associates.”

Chart - U.S. Stocks’ Cumulative Returns by Decade

“This decade is on pace to be the worst period ever for owning stocks. On the right are the annual returns, by year and decade, for a broad measure of stock-ownership. Stock returns were even better during the Civil War and World War I than from 2000 to 2009.”

Source: WSJ


http://seekingalpha.com/article/179549-a-lost-decade-for-u-s-stocks?source=hp_wc

Lost Decade Looming?

May 20, 2010
Lost Decade Looming?
By PAUL KRUGMAN

Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.

For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. Greece is held up as a cautionary tale, and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits. Meanwhile, there are continual warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” tightening credit by selling off assets and raising interest rates.

And what about near-record unemployment, with long-term unemployment worse than at any time since the 1930s? What about the fact that the employment gains of the past few months, although welcome, have, so far, brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis? Hey, worrying about the unemployed is just so 2009.

But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

Let’s talk first about those interest rates. On several occasions over the past year, we’ve been told, after some modest rise in rates, that the bond vigilantes had arrived, that America had better slash its deficit right away or else. Each time, rates soon slid back down. Most recently, in March, there was much ado about the interest rate on U.S. 10-year bonds, which had risen from 3.6 percent to almost 4 percent. “Debt fears send rates up” was the headline at The Wall Street Journal, although there wasn’t actually any evidence that debt fears were responsible.

Since then, however, rates have retraced that rise and then some. As of Thursday, the 10-year rate was below 3.3 percent. I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances. What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt.

What’s behind this new pessimism? It partly reflects the troubles in Europe, which have less to do with government debt than you’ve heard; the real problem is that by creating the euro, Europe’s leaders imposed a single currency on economies that weren’t ready for such a move. But there are also warning signs at home, most recently Wednesday’s report on consumer prices, which showed a key measure of inflation falling below 1 percent, bringing it to a 44-year low.

This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese. And the answer is, nothing.

It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

Will the worst happen? Not necessarily. Maybe the economic measures already taken will end up doing the trick, jump-starting a self-sustaining recovery. Certainly, that’s what we’re all hoping. But hope is not a plan.


http://www.nytimes.com/2010/05/21/opinion/21krugman.html?src=me&ref=general

Lessons to be learned from the decade that shocked the stock market

Lessons to be learned from the decade that shocked the stock market
It has been a decade that many investors would rather forget.
On December 31, 1999 the FTSE100 closed at 6,930 and 10 years on it still has some distance to go before it regains this peak, sitting at around just 5,300 last week.

By Emma Simon
Published: 7:00AM GMT 28 Dec 2009

1. A guarantee is only as good as the guarantor
Structured products may have been guaranteed by Wall Street investment banks. But once Lehman's went bust, people realised that many of their guaranteed investments weren't as guaranteed as they thought.

2. Don't buy something you don't understand
Financial advisers often point out that many people drive a car without fully understanding how the internal combustion engines works. But those who got lost money in split-capital trusts and precipice bonds will no doubt now think twice before being reassured by such twaddle. If a car breaks down there is always the AA; there isn't any equivalent rescue service when it's your life savings.

3. Higher returns come with higher risks
If you want to better returns than a building society account you need to take more risk with your money. This almost always means you could lose capital.

4. Don't pay more than you have to
The advent of the internet and price comparison sites mean people can now shop around for financial deals and compare prices and products more effectively.

5. Long-term investments don't always mean long-term gains
Just because an investment should be held for a minimum if five years, doesn't mean you will get a positive return at the end of this period, as the "lost decade" for equities demonstrates.

6. Ask how your adviser earns his money
Commission skews judgements; it pays to inquire why comparable products aren't being recommended.

7. Read the small print
What will you be charged if you exceed your overdraft limit? What penalties will be applied if you cash the investment in early? When can the insurer turn down your claim? Such vital information is almost always in the small print.

8. Don't rely on easy credit
Many assumed cheap loans, remortgages and interest-free credit cards would bail them out of any financial difficulty. But these credit lines disappear when times get tough.

9. Don't rely on others to provide a pension
If you want a decent retirement, start saving. Employers have watered down pension schemes while the value of the state pension has declined. Even generous public sector pension look under threat.

10. What goes up also comes down
Shares prices can plummet, house price can fall, and interest rates can tumble – as well as rise sharply too. It's best to plan for such eventualities. They almost always happen.

http://www.telegraph.co.uk/finance/personalfinance/investing/6867372/Lessons-to-be-learned-from-the-decade-that-shocked-the-stock-market.html

Nikkei 225 and the Lost Decade

Nikkei 225

The postwar rise in Japanese stocks is quite remarkable. The Nikkei Dow Jones Stock Average, patterned after the U.S. Dow Jones Average and containinng 225 stocks, was first published on May 16, 1949. The day marked the reopening of the Tokyo Stock Exchange, which had been officially closed since August 1945. On the opening day, the value of the Nikkei was 176.21 - virtually idential to the U.S. Dow Jones Industrials at that time. By December 1989, the Nikkei soared to nearly 40,000 more than 15 times that of the Dow. Japan's bear market brought the Nikkei below 10,000 following the terrorist attacks in September, 2001, just above the level reached by the American Dow. On February 1, 2002, the Nikkei closed at 9,791, below the Dow for the first time.

However, comparing U.S. and Japanese Dow indexes overstates the extent of the Japanese decline. The gain in the Japanese market measured in DOLLARS far exceeds that measured in YEN. The yen was set at 360 to the dollar 3 weeks before the opening of the Tokyo Stock Exchange - a rate that was to hold for more than 20 years. Since then, the dollar has fallen to about 130 yen. In dollar terms, therefore, the Nikkei climbed to over 100,000 in 1989 and is currently over 30,000, three times its American counterpart, despite the great bear market that has enveloped Japan in the past decade.

Nikkei 225 was 9,522.50 on 29th May 2009.... reminiscent of the lost decade.

When Consumers Cut Back: An Object Lesson From Japan

When Consumers Cut Back: An Object Lesson From Japan

By HIROKO TABUCHI

Published: February 21, 2009

TOKYO — As recession-wary Americans adapt to a new frugality, Japan offers a peek at how thrift can take lasting hold of a consumer society, to disastrous effect.

Multimedia
Graphic
In Japan, Neither Spending Nor Saving

The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan’s economy.
Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.
The Takigasaki family in the Tokyo suburb of Nakano goes further to save a yen or two. Although the family has a comfortable nest egg, Hiroko Takigasaki carefully rations her vegetables. When she goes through too many in a given week, she reverts to her cost-saving standby: cabbage stew.
“You can make almost anything with some cabbage, and perhaps some potato,” says Mrs. Takigasaki, 49, who works part time at a home for people with disabilities.
Her husband has a well-paying job with the electronics giant Fujitsu, but “I don’t know when the ax will drop,” she says. “Really, we need to save much, much more.”
Japan eventually pulled itself out of the Lost Decade of the 1990s, thanks in part to a boom in exports to the United States and China. But even as the economy expanded, shell-shocked consumers refused to spend. Between 2001 and 2007, per-capita consumer spending rose only 0.2 percent.
Now, as exports dry up amid a worldwide collapse in demand, Japan’s economy is in free-fall because it cannot rely on domestic consumption to pick up the slack.
In the last three months of 2008, Japan’s economy shrank at an annualized rate of 12.7 percent, the sharpest decline since the oil shocks of the 1970s.
“Japan is so dependent on exports that when overseas markets slow down, Japan’s economy teeters on collapse,” said Hideo Kumano, an economist at the Dai-ichi Life Research Institute. “On the surface, Japan looked like it had recovered from its Lost Decade of the 1990s. But Japan in fact entered a second Lost Decade — that of lost consumption.”
The Japanese have had some good reasons to scale back spending.
Perhaps most important, the average worker’s paycheck has shrunk in recent years, even after companies rebounded and bolstered their profits.
That discrepancy is the result of aggressive cost-cutting on the part of Japanese exporters like Toyota and Sony. They, like American companies now, have sought to fend off cutthroat competition from companies in emerging economies like South Korea and Taiwan, where labor costs are low.
To better compete, companies slashed jobs and wages, replacing much of their work force with temporary workers who had no job security and fewer benefits. Nontraditional workers now make up more than a third of Japan’s labor force.
Younger people are feeling the brunt of that shift. Some 48 percent of workers age 24 or younger are temps. These workers, who came of age during a tough job market, tend to shun conspicuous consumption.
They tend to be uninterested in cars; a survey last year by the business daily Nikkei found that only 25 percent of Japanese men in their 20s wanted a car, down from 48 percent in 2000, contributing to the slump in sales.
Young Japanese women even seem to be losing their once- insatiable thirst for foreign fashion. Louis Vuitton, for example, reported a 10 percent drop in its sales in Japan in 2008.
“I’m not interested in big spending,” says Risa Masaki, 20, a college student in Tokyo and a neighbor of the Takigasakis. “I just want a humble life.”
Japan’s aging population is not helping consumption. Businesses had hoped that baby boomers — the generation that reaped the benefits of Japan’s postwar breakneck economic growth — would splurge their lifetime savings upon retirement, which began en masse in 2007. But that has not happened at the scale that companies had hoped.
Economists blame this slow spending on widespread distrust of Japan’s pension system, which is buckling under the weight of one of the world’s most rapidly aging societies. That could serve as a warning for the United States, where workers’ 401(k)’s have been ravaged by declining stocks, pensions are disappearing, and the long-term solvency of the Social Security system is in question.
“My husband is retiring in five years, and I’m very concerned,” says Ms. Masaki’s mother, Naoko, 52. She says it is no relief that her husband, a public servant, can expect a hefty retirement package; pension payments could fall, and she has two unmarried children to worry about.
“I want him to find another job, and work as long as he’s able,” Mrs. Masaki says. “We must be ready to fend for ourselves.”
Economic stimulus programs like the one President Obama signed into law last week have been hampered in Japan by deflation, the downward spiral of prices and wages that occurs when consumers hold down spending — in part because they expect goods to be cheaper in the future.
Economists say deflation could interfere with the two trillion yen ($21 billion) in cash handouts that the Japanese government is planning, because consumers might save the extra money on the hunch that it will be more valuable in the future than it is now.
The same fear grips many economists and policymakers in the United States. “Deflation is a real risk facing the economy,” President Obama’s chief economic adviser, Lawrence H. Summers, told reporters this month.
Hiromi Kobayashi, 38, a Tokyo homemaker, has taken to sewing children’s ballet clothes at home to supplement income from her husband’s job at a movie distribution company. The family has not gone on vacation in two years and still watches a cathode-ray tube TV. Mrs. Kobayashi has her eye on a flat-panel TV but is holding off.
“I’m going to find a bargain, then wait until it gets even cheaper,” she says.

http://www.nytimes.com/2009/02/22/business/worldbusiness/22japan.html?em