Looking on the Bright Side

01/13/2009 11:00 am EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says 2008 was a horrendous year, but all markets eventually turn around, and she sees some hopeful signs.

There was almost no place to hide from the crash of 2008. Nearly every investor’s portfolio declined dramatically as markets around the globe suffered historic losses and segments of the bond markets simply stopped functioning for a time.

Looking at last year’s performance is painful: Nearly every category of fund suffered its largest decline ever. The average US diversified stock fund tumbled 40% for the year, suffering an average decline of 25% in the fourth quarter alone.

International stock funds were hit harder than domestic funds last year, down 46% on average, partly because of the dollar’s rebound. Emerging markets like Latin America, which had previously powered investor returns, tumbled hard in 2008.

On the bright side, December brought the first monthly gains since May 2008, with almost all equity funds posting strong positive returns. Since the November lows, stock markets have gained 20% or more. On the up side, small-cap and growth funds brought in the strongest gains.

We begin the New Year with much to be thankful for and more to look forward to. This may sound strange coming on the heels of the brutal year just ended. But we are hopeful that excess and greed have been wrung out and prudence and pragmatism will return. Frugality has once again become a virtue. US savings rates are growing, and we are optimistic about positive cultural shifts.

As important as it is to be realistic, it is also critical to recognize that the future is not a reflection of the past. We must learn from our experiences and be aware of the tendency to let our most recent experiences color our judgment. Investors typically expect what has happened in the recent past to continue. When the market trend is up, most expect further gains indefinitely. After severe declines, few see the possibility of recovery.

Over the past year, we’ve continually reminded readers that market corrections and bear markets are part of normal market activity. Now it’s time to point out that the market goes up far more often that it goes down. After 2008, there are opportunities for investors in the wake of such steep declines.

Investors have retreated and, to a large extent, are hiding in short-term instruments that yield next to nothing. Never before have such large amounts been held in cash. With the federal funds rate near 0% and the Federal Reserve using all of the tools at their disposal, borrowing rates will stay low. It will be increasingly difficult for investors with over $3 trillion in money market funds and savings accounts to justify investing for a negative real return.

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