I enjoy reading about finance and investing, and I especially enjoy reading articles published many years ago.
Written in the heat of the moment, these articles are like black boxes that contain people’s concerns at a specific point in time. You can learn a lot by reading them.
Recently, I came across an excellent paper dated September 11, 2010 written by my colleague Stéphanie Grammond.
This is the headline that struck me: “Small Investors Are Leaving Stocks1 “.
You don’t have to look far to understand why investors didn’t like stocks in 2010. The market had just experienced the worst financial crisis since the Great Depression. From its peak in October 2007, the S&P 500 index, which represents the 500 largest publicly traded companies in the United States, had fallen 53% in less than two years, to settle at a point lower than it was 10 years earlier.
In short, buying shares at that time was as appetizing as going to the bottom of the compost bin hoping to find a carrot that was almost edible…
“In Canada, individuals have also deserted the prosecutor’s office,” writes Stéphanie. During this time, they stocked up on bond funds and balanced funds. »
A person quoted in the article, Jean-Sébastien, 37, explained that he turned to bonds because the financial crisis which shook Europe at that time foreshadowed other falls.
“We saw what happened with the banks during the credit crisis. Now it’s the same, but with countries,” he said.
Small investors were not the only ones to abandon stocks in 2010: a strategist from the American giant Citigroup even announced in a report the death of the “cult of stocks” and proclaimed the advent of the new “cult of bonds”.
The exam and the answers
We know the rest: the stock market took off in 2010, and never looked back. A $10,000 investment in a fund that replicates the S&P 500 index at that time was worth more than $49,000 as of January 31, 2023, including the reinvestment of dividends. Average growth of nearly 14% per year, one of the best periods in the history of US financial markets.
And the same $10,000 invested in the bond fund Vanguard Total Bond Market ETF (BND) in 2010 is worth just over $12,000 today, one of the worst performances in history.
The final insult: Investors who picked up bonds in 2010 couldn’t even sleep peacefully, because in the worst year, that investment fell 13%, compared to 18% for the S&P 500.
If I tell you this, it’s because once you have the answers, it’s tempting to look at the exam and say that it was easy.
Now, let’s put ourselves in the head of an investor in 2010. He has just seen his stock portfolio lose half of its value in less than two years – in addition to having seen it fall overall for a decade. And he should not react?
We forget how much the mere mention of the United States caused a retching in 2010. I was living in the United States at that time, and I remember that many friends in Quebec took pity on me.
“The United States will never recover,” I was told, referring to the economic crisis of 2008-2009, which caused unemployment to explode in the United States and elsewhere. Their economic and social problems are just too great. »
At that time, many investors were therefore ready to get rid of their shares to buy bonds. In short, to throw away “poison” investments to buy “elixir” investments.
But markets are not static. What is poison one year may not be the next year (or the next decade). And the elixir does not always have the magical properties attributed to it.
By definition, a diversified portfolio will always have components that perform less well, and even components that perform disastrously. It is our assurance for the future: knowing that whatever is in it, we will be able to enjoy it.
Today, it is international equities that are unpopular because they have been beaten by US equities for the past 10 years. Could this trend ever be reversed? No idea, but in my opinion, that’s where all-in-one funds shine: they take all that guesswork out of the future of the markets.
For example, the BMO All Equity ETF Fund (ZEQT) contains US, Canadian and international stocks. So every dollar you invest in it is automatically diversified. Many of the other variations of this fund also contain bonds, such as ZGRO (20% bonds) and ZBAL (40% bonds), which makes them less volatile during market downturns.
All of this reminds us that the best investors are generally those who care the least about their investment portfolio. They are diversified and shop when they have money to invest, and that’s it.
My colleague Stéphanie had found a perfect conclusion to her 2010 article. She made the connection between the “anti-action” sentiment that reigned and that which had struck three decades earlier, in the late 1970s, when the financial magazine Business Week had proclaimed on its cover the “death of stocks” after years of brutal falls.
“Soon after, the stock market began a long bull cycle,” she observed.
The more it changes…