Not so long ago, my newly employed friends and I applauded ourselves for being responsible and choosing to make high automatic contributions to our 401(k)s. A few years later, we’ve hardly been rewarded for taking the “prudent” route. Far from watching our savings grow, we’ve lost much of it.
For those of us in our twenties who are beginning to generate income and wondering how to make the most of our savings, the behavior of the stock market during the past few years has been uninspiring to say the least. To start, the performance of domestic equities over the past 10 years has been unimpressive. If one invested $10,000 in the Dow Jones Wilshire 5000 Index, which tracks the 5,000-largest public companies in the United States and which is a nearly complete representation of the broader stock market, three years ago, it would have been worth about $6,500 at the end of March 2009 (based on the return of SPDR DJ Wilshire Total Market (TMW), an exchange-traded fund that tracks the Wilshire 5000).
What’s more, the precipitous marketwide downfall that characterized the second half of 2008 called into question for many the worth of diversification, as nearly all asset classes apart from Treasury bonds suffered severe blows. This came as a shock to those who believed that diversification would help them avoid portfoliowide stumbles. Furthermore, the deleterious and hard-to-predict impact that heavy-hitting, low-transparency vehicles such as hedge funds have had on the broader market recently, combined with the market’s recent apparent disregard for company fundamentals, has left many less-sophisticated investors feeling as though the deck is stacked against them.
Yet investor sentiment often runs the most negative when it’s most opportune to invest, and right now is shaping up as a golden opportunity for newbies. By many measures, stocks look cheap. Although they’ve been early, many of the mutual fund managers with whom Morningstar analysts speak daily have been touting the cheapness of stocks for months. Brian Rogers, T. Rowe Price’s chief investment officer and manager of T. Rowe Price Equity Income (PRFDX), has said that stocks look inexpensive relative to historic norms. Marty Whitman and Ian Lapey have been increasing their personal investments in their own Third Avenue Value (TAVFX) for the attractiveness of its current portfolio. Chuck Royce and Whitney George have been bargain-hunting for their Royce Premier (RYPRX) portfolio.