Thursday, December 9, 2010

The S&P 500 index first began tracking large US company stock prices in 1923. The typical "mountain chart" that tracks the index's value over time is a squiggly line that rises dramatically with occasional dips before continuing its upward march.

But while this chart is a good indicator of the long term progress of stocks, it doesn't show the obvious "waves" that have occurred over time. A more revealing, and possibly instructive chart would show how stocks move in up and down cycles over decades.

For example the Roaring Twenties saw average annual stock returns of over 15%, but that was followed by the Great Depression of the 1930's when stocks averaged less than 1% annually. The 1940's saw a rebound in average returns up to 9% and continued into the best decade for stocks in history, the 1950's.

 

This post WWII decade dazzled investors with average annual returns over 19%!

The 1960's began a two decade swoon for stocks with average annual returns around 7.5%. But after twenty years of below average returns the greatest bull market in history began in the 1980s and surged through the 1990's. These two decades enjoyed unprecedented average annual returns of over 17%!

But with the advent of the 2000s the stock market waves came crashing down again and ended the decade with the worst ten year average annual return in history for the S&P 500; -.87%. Of course this doesn't mean the next ten years will continue the below average returns.

However, with the economic headwinds facing investors today it doesn't look like we're on the verge of a new bull market anytime soon.That's why investors would be wise to consider the following three strategies designed to "surf through" the waves of this economic cycle:

1. Stocks with good dividends should be a primary asset class. Dividends can be reinvested as earned and will serve as a buffer against another market decline.

2. Emerging markets will probably perform better than US companies. Don't be afraid to invest internationally since the odds favor more growth in China, Brazil, India and similar emerging market economies.

3. Hedge your bond portfolio from rising interest rates. With interest rates at historic lows and inflation beginning to creep back up you can bet interest rates won't stay this low much longer. International bonds make more sense than US bonds in this scenario so invest accordingly.