I spend as much of my time and energy as I can helping people to be more successful investors. Most of this comes down to teaching.
If you’re one of my regular readers, you probably know a great deal about successful investing. Maybe you’d like to teach others, too.
With that in mind, I recorded a podcast about one of the best teaching tools I know: A table of year-by-year investment returns for nine asset classes from 1999 through 2018.
For those who want to dig in to some data about asset classes and how they have performed over the past 20 years, I recommend this brightly-colored table.
I’ve drawn on it for statistics in this article.
If you’d like to teach your friends, your kids or anybody else about investing, I’ll suggest 12 good lessons.
You may already know most (if not all) of this material, but as the saying goes, “Teaching teaches the teacher.” So a review never hurts.
You don’t have to try to teach these lessons all at once, and in fact they are probably absorbed more easily one at a time.
Lesson 1: Investing money is a risky business. Sure you can make money (that’s the whole idea, actually). But you can actually lose money, too. (In fact, some losses along the way are pretty much inevitable.)
How often you’ll lose money, or just how much, is hard to predict. But if you follow the past returns of a mutual fund or an asset class, you’ll get a good idea of what can happen.
Reading for extra credit: An article I wrote last year, based on annual returns from 1970 through 2017.
Lesson 2: Diversification pays off. In 1999, 20 years ago, most investors believed it was essentially impossible to beat the S&P 500 index SPX, +0.58% which (it turned out) was then in the final months of a quarter-century-long bull market that produced unprecedented compound returns of 17.2%.
However, from 1999 through 2018, the S&P 500 compounded at 5.6%, while a diversified portfolio equally invested in five equity asset classes from our colorful table (large-cap blend U.S. stocks, small-cap blend U.S. stocks, international stocks, emerging markets stocks and real-estate stocks) compounded at 7%.
Reading for extra credit: An article containing the best diversification advice I know.
Lesson 3: Small numbers can become really big numbers. The difference, just noted, between returns of 5.6% and 7%, can be life-changing over an extended period. This is just as true for retirees living off their investments as it is for younger investors who are accumulating.
Over 20 years, a compound return of 5.6% will turn $10,000 into $29,736; at 7%, that $10,000 would grow to $38,697.
Over 30 years and starting with $50,000, that “small” difference in return is the difference between $256,382 (5.6%) and $380,613 (7%).
Reading for extra credit: An article showing how half a percentage point of additional return can change your life.
Lesson 4: Here’s something that might not be immediately intuitive: That additional return from the diversified portfolio was the result of investing 80% of the money in four asset classes — each of which was riskier than the S&P 500.
Because these five equity asset classes didn’t rise and fall together, their ups and downs partially offset one another. The result: an overall portfolio that was not significantly more volatile than the S&P 500 by itself.
There’s a bit of irony for you: It is possible to invest in riskier asset classes and experience lower risk.
Reading for extra credit: A thoughtful article from last year showing the benefits of diversifying into four funds.
Lesson 5: The benefits of diversification don’t show up every year.
In the most recent 20-year period, the S&P 500 outperformed a five-asset-class combination in nine years and trailed in 11 years.
In 2009, the combination was up 40.7% while the S&P 500 appreciated “only” 26.5%. Four years later, in 2013, the combination was up “only” 18.7% and the S&P 500 rose 32.4%.
In any given year, you never know what will happen.
Lesson 6: Trends that look really hot can’t be relied on to continue. From 2003 to 2007, while U.S. large-cap stocks compounded at 12.8%, emerging markets stocks grew at 37%, beating all the other major asset classes in our table.
Many investors concluded that emerging markets stocks were “the answer,” and lots of money poured into them. Many of these eager investors must have been pretty shocked when emerging markets stocks lost 53% in 2008.
Reading for extra credit: An article giving 10 things you should know about asset classes.
Lesson 7: Bonds, almost always less volatile than stocks, are usually regarded as low-risk investments. But bond investing is trickier than you might think.
For example, when interest rates are rising (and you might expect bonds to be more valuable because of higher payouts), bond prices can fall.
Reading for extra credit: An article I wrote a few years ago about bonds.
Lesson 8: All bonds are not created equal. For example, high-yield bonds, also known as “junk bonds,” are not for the faint of heart.
In 2008, high-yield bonds as an asset class lost 28%. In 2009, that asset class registered a spectacular gain of 58%. This is not a roller coaster that many investors will want to ride out.
So look carefully before you leap.
Reading for extra credit: An article called “Are High-Risk Bonds Too Risky?”
Lesson 9: Though it can be tempting to diversify into international bonds, that won’t necessarily reduce volatility. International bonds lost nearly 9% in 1999, and did so again in 2005.
During the most recent 20 calendar years (1999 through 2018), international bonds produced six losing years, with losses averaging 4.4%. U.S. bonds, by contrast, had only four losing years, with losses averaging 2%.
Reading for extra credit: An article on currency risk and international bonds.
Lesson 10: Be patient and don’t expect miracles. Keep your living expenses and your investment expenses low. If you regularly save money over the years, make sensible decisions, and achieve the returns of the overall market, you will almost certainly have investment returns that are above average.
Reading for extra credit: My book “Financial Fitness Forever” can be a good teaching tool. Here’s a free sample chapter.
Lesson 11: Don’t try to outsmart the market or try to “strike it rich” by taking hot tips from friends, relatives, the financial media, or brokers.
There’s one very reliable way to wind up with a small fortune from “playing” the stock market: Start by investing a large fortune.
Reading for extra credit: An article on the many ways you can muck things up.
Lesson 12: Informed investors are likely to do better than those who don’t want to be bothered with learning things.
My favorite quote from Ben Franklin suggests something we often forget, “An investment in knowledge pays the best interest.”
Now that you’ve made it all the way through these lessons, I think you’ll be a good teacher if you put your mind to it.
I hope you’ll do that. It will be good for your pupils — and good for you, too.
For my students at Western Washington University, I have recorded a podcast of my best advice for first-time investors.
Richard Buck contributed to this article.
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