Looks like another good year for stocks
It appears that 2006 will be the fourth consecutive year of positive returns for the major stock market indices, and that their returns will exceed historical averages. The year-to-date total returns as of December 8 for four major indices are shown in the chart below.
A few significant facts stand out. After several lackluster years, foreign stock returns have soared over the past four years, significantly outperforming U.S. stocks during that time period. In addition, the returns of U.S. large-company stocks have lagged behind the returns of U.S. small-company and foreign stocks over the same time period.
Index |
Return |
S&P 500 (U.S. large companies) |
12.9% |
Russell 2000 (U.S. small companies) |
19.0% |
MSCI EAFE (foreign developed markets) |
21.4% |
MSCI EM (foreign emerging markets) |
25.3% |
Investors tend to amplify these types of short-term trends, believing that they will continue for the foreseeable future. History has shown, however, that making investment decisions on such assumptions is usually a bad move. While nobody can consistently predict how stock markets will perform, you would be prudent to assume that the longer these trends go on, the less likely they will continue.
This means that after four consecutive years of stock market gains, you should not be surprised if any or all of these asset classes experience a losing year or years in the future. Despite this, including stocks in your portfolio at all times is a wise long-term strategy. Over the course of many years, stocks outperform less-risky investments such as bonds and cash, despite periodic shorter-term blips.As always, the most prudentinvestment approach is to:
·Determine your asset allocation strategy based upon your risk tolerance
·Diversify your portfolio among a variety of asset classes
·Periodically rebalance your portfolio when it strays from your desired allocation
·Stick to your asset allocation strategy through thick and thin
Remember that, whether markets are rising or falling, investing is a long-term process that requires patience and discipline.
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