By definition, cannibalizing describes an act where a person’s attempt to improve a condition backfires against an existing situation. Not willingly, nevertheless very effectively, investors have been cannibalizing their own portfolios.
Enticed by a multi-decade bull market, many investors tried to improve their portfolio’s return. Based on the almighty wisdom of the risk/reward principle, we know that high returns and a high degree of safety cannot co-exist.
Even though it has been thought that portfolios can be milked for extra return without giving up safety, deep down we know that one has to be sacrificed for the other. Many opted to cannibalize safety for higher returns and got neither.
A quick glance at a chart reveals that the Dow Jones (NYSEArca: DIA – News), S&P 500 (NYSEArca: SPY – News), Nasdaq (Nasdaq: QQQQ – News) and many other indexes trade at levels not seen for well over a decade. When it comes to investing, time is money and the last decade has been a ‘lost decade.’
The ‘lost decade’
Lost, why? $100,000 invested in the S&P 500 from April 1989 to April 1999 would have mushroomed into $426,000. $100,000 invested in the S&P 500 from April 1999 to April 2009 would have shrunk to less than $6,500. $100,000 invested held from 1989 all the way to 2009 would be worth $284,000 today. This translates into a 20-year average annual return of 5.3% before taxes and inflation.
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