Three years ago, the first decade of the twenty-first century looked destined to be a winning one for investors. Markets across the globe had reached unprecedented highs, and the question in most people's minds was where the best gains would come from during the final few years of this decade. Was it better to invest in China or India, where 40 per cent annual appreciation wasn't out of the question, or put money in developed markets, where returns of 10 per cent or more seemed assured?
Back then, investing was all about the search for relative returns. Three years and a major financial crisis later, however, towering financial institutions lie in shambles, once-unshakable markets lie in a million pieces, and those lavish years of speculative glory are nothing but a bitter memory. It has, in the final analysis, been a weird and mostly depressing decade for investors, and one that has come with more ups and downs than a trashy airport bookstore thriller. A look at the final tally tells the whole story: the Dow Jones Industrial Average, a measure of large US stocks, sunk 8.2 per cent since the beginning of 2000, with a lot of volatility in between. The S&P 500, another big US index, is down 23 per cent.
The UK's FTSE 100 has tumbled 22 per cent. European stocks have shed 7.3 per cent. The only real bright spots in stocks were emerging markets, which despite goosebump-raising highs and hair-pulling lows have at least turned in a decade in the black. The MSCI Emerging Markets index has gone up by about 110 per cent on the back of strong performance in the so-called BRIC countries - Brazil, Russia, India and China. That may look like a big figure, but average it over 10 years and it only comes to 7.7 per cent a year, about the return investors hope for in developed-world equities.
Bonds also ended the decade with a modest 8.4 per cent price rise, according to a major fixed-income index, not a bad result considering the amount of income those securities threw off over that span. Bonds' resilience wasn't especially surprising, given that bonds tend to be, well, resilient. Still, if you'd told me three years ago that bonds would outperform stocks in the first decade of the 2000s, I'd have laughed you out of town - and hit you about the knees with a stick on your way out.
As things shook out, virtually the only major asset that had a banner decade was gold. Gold began 2000 at US$282 (Dh1,035) per ounce and ended the year at about $1,080, a gain of almost 300 per cent, or 14.4 per cent a year. That's nothing to sniff at, even if gold, as I have argued before, is far from the ideal investment. It may bring you rewards as incomes rise - the logic being that people buy more gold when they get wealthier, skewing the supply-demand equation and raising the price - but owning the shiny stuff doesn't come with any of the dividends or shareholder rights attached to stocks and bonds. In the end, it's just a commodity, and its owners are slaves to its price.
Gold's flaws aside, there's no better testament to the way the financial winds have changed over the past decade than the final numbers. By and large, they don't look good. They look so bad, in fact, that you could be forgiven for vowing never to invest again. Yet never again casting your dirhams into the world's investment pool based on a decade of tumult would be a mistake. Sure, the world went through some difficult times. The decade kicked off with the tail-end of the tech crash, looked better for a while, and then took another financial-crisis-induced dive. In the grand scheme of things, though, ten years just isn't a very long time.
That's right. A decade may seem like ages, but success in investing is measured in much longer spans. Warren Buffett didn't accumulate his riches in 10 years. Nor did Benjamin Graham before him. You'll have to wait for many economic cycles to come and go before the verdict is in on any long-term investment plan. For that reason, how closely investors hew to well-thought-out plans and don't let themselves get led astray by short-term market moves will play a large role in deciding their returns in the next decade. I don't like to make predictions, because predictive attempts are fraught with error, but I'm fairly sure of one thing: investors who dig in during the hard times will be around to harvest returns when the economic sun rises. Those who quake under pressure will pay the price, in the form of fees associated with investment transactions and missed days in the market - days when, all of the sudden, things could start looking a lot better.
There's a fishing adage that old anglers grumble at less-experienced friends who switch strategies and change lures if nothing's biting: if you're bait's not in the water, you can't catch any fish. Simple but irrefutable. So don't reel it in just yet. And here's to hoping for a more profitable decade ahead. afitch@thenational.ae
