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How My Investments Prospered in the Lost Decade

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Some might wonder how I managed to retire in early 2011, after the terrible 2000’s, which many analysts have called the “lost decade.” (At the start of January 2000, the Dow index stood at 11,497. At the end of December 2010, it was less than 1% higher at 11,578. An atrocious return, even if dividends are counted!)

What was it about my portfolio that allowed it to grow and achieve decent returns through much of the decade? I’ll give a longer and more detailed answer to that question elsewhere, but here I want to offer the simple, “one-minute” reply.

Three factors stand out:

  1. I owned a lot of bonds. I’m a conservative investor and maintained a roughly 50% bond asset allocation throughout. Normally this would reduce returns, as well as volatility. But bonds prospered in the 2000’s. For example, the recent 10-year return on the Vanguard 500 Stock Index Fund (VFINX) was just 2.7%, but on the Vanguard Total Bond Market Index Fund (VBMFX) that return was 5.4% — exactly double. That’s a big difference when large sums and long time periods are involved, and the difference in my specific portfolio was even more significant.
  2. I never stopped saving aggressively and I never sold stocks. Especially not at the lows. I kept buying. I doubled my 401(k) contribution in late February 2009, near the market low. I knew that stocks were “on sale” and that I stood no chance of retiring soon if I panicked and sold out, so I might as well accept the risk of staying invested. And I owned enough bonds and conservative investments that held their value, that I could still sleep at night, even when parts of my portfolio were way down.
  3. I also owned some commodity or natural resource funds. Though they were never more than about 15-20% of my portfolio, and though I failed to rebalance at one point when they became overweighted, they still posted very strong returns, and added some punch to overall performance. They also rose when the market was falling at critical points, giving me further confidence to stay invested in other areas that weren’t doing as well.

*Disclaimer: I offer this snapshot of my personal investing history for educational purposes only. I did some things right, but I also experienced some good fortune. My exact strategy can’t, and shouldn’t, be duplicated, because you are different from me and the future won’t be like the past. I make no claims that these factors will produce good performance going forward. I hope you can learn some general principles from what I did, but the details and results will depend on your own situation and on future events. Thanks.