Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Sunday, January 3, 2010

What to Expect in the Next Decade

A recent article in the Wall Street Journal, “Investors Hope the ‘10s Beat the ‘00s” by Tom Lauricella, showed a graph of the stock market returns by decade since the 1830s. As it stood on December 21, 2009 the decade from 2000 to 2009 was set to be the worst decade ever for stocks. So what can we expect in the next decade?

We should first note that the stock returns for the decade following each of the previous worst three decades since 1830 (1830s, 1910s, 1930s), all proved to be quite good for stocks (12.8% return in the 1840s, 13.3% in the 1920s, 9.6% in the 1940s). Keep in mind, however, that the 1920s were followed by the great depression of the 1930s. Can we be sure the 2010 decade will be better than the 2000 decade?

Another article in the Journal by Gerard Baker titled “A Gloomy Crystal Ball, With Glimmers” for the most part is not all that optimistic about the next decade. Mr. Baker states: “Just because one year, one decade, is forgettable doesn’t mean the next one won’t be even worse.” Mr. Baker states that the immediate outlook “warrants pessimism”.

Consumers are trying to reduce their excessive debt, trying to save more and will likely consume less than in recent times. The government is facing huge deficits as a result of its recent unparalleled spending spree. Current low interest rates could trigger continued decline in the dollar and high inflation. Future interest rates will likely rise substantially as a corrective measure by the Federal Reserve. We still have many residential foreclosures to come in 2010 and the commercial real estate market is a serious concern. Mr. Baker notes that “it took 25 years for the Dow Jones Industrial Average to return to its inflation-adjusted 1929 peak.”

But all is not gloomy. Americans are very resilient. We’ve recovered before and can do so again. As Mr. Baker states, “Americans are rather good at learning quickly from their mistakes.”

So what should you do to prepare for a worrisome 2010 and beyond. A lesson from 2009 will help. At the beginning of the 2009, would you have expected high yield bonds to return more than 45% this year? Would you have expected real estate mutual fund returns to top large domestic stock returns. The point is, it’s tough to know which asset classes will do the best in any given year. Therefore, the first thing you need to do to prepare for 2010 and beyond is to make sure your portfolio is broadly diversified and tuned to your risk tolerance.

In addition to that, we suggest you rebalance your portfolio at least annually, eliminate credit card debt, make sure you have an adequate emergency fund, step up your savings program, eliminate unnecessary spending to the extent possible and minimize investment expenses and taxes. Finally, we suggest you review all of your insurance policies to make sure your coverage is adequate.

While no one can predict what will happen in the next decade, taking the steps above will help prepare you for whatever may come your way.


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