Betafolio: Return of the Decade

Cast your mind back 10 years ago. Do you remember where you were in January 2010?

I remember it well.  I’d just got married, bought half-a-house, and then boom, I got fired. Suddenly, I was a broke-ass 27 year old, in debt up to my eyeballs. The future had never looked so bleak. I was in a hole and I had no idea how to dig myself out.

I had arrived in the UK some five years prior, on a scholarship and £300 spending money from my dad, his entire life savings. But now, that dream of a better life was turning into a horrible nightmare.

The economy wasn’t in such great shape either. Reeling from the Great Financial Crisis, the UK economic barely managed to escape a recession in 2009 as it crawled its way out of the deepest recession since the 1930s. Unemployment was 8%, meaning that around 2.5m people were looking for work. I was one of them.

The global economy was on life support as central bankers across the world were printing money. Interest rates were heading for rock bottom, which economists told us meant we were entering a ‘low-return world.’

It was all too obvious, to financial pundits at least, the next decade was going to be a very difficult one for the economy and for financial markets.

Amazingly, the 2010s turned out to be a golden decade despite the way it started. (Or should I say, because of how the decade started.)

According to Ben Carlson of Ritholt Wealth:

  • 2010s is the only decade since 1850 that the US didn’t experience a single recession
  • It’s the first decade in over 150 years since 1850 (which is about as far back as we have good data) that the U.S. didn’t experience a single recession
  • The S&P 500 hit a new all-time high more than 200 times in this decade alone
  • S&P was up in nine out of 10 yrs, including seven years of double-digit gains and three years of  20% + annual return

What started as a gloomy decade for the global economy ended up as a golden one. Investors who stayed the course and put their capital (and their faith in free enterprise) to work – against all odds – have been handsomely rewarded. The speculators who sat on the sidelines listened to fear-mongers or tried to outsmart the markets have only themselves to blame.

For U.S. Equity, the 2010s delivered above average returns in real terms as $100 invested in U.S. Equity grew to$352, after accounting for inflation.

For U.K. Equity, £100 invested at the start of the decade grew to £177 after accounting for inflation.

Global Equity turned £100 to £226, after accounting for inflation.

Even bonds didn’t fare terribly. Global Bonds turned £100 invested at the start of the decade into £140 after adjusting for inflation. This is in spite of the fact that the ‘low yield’ environment was supposed to signal a low expected return on fixed income assets. 

It was neither the best of times nor the worst of times. So I guess we could call it a pretty ordinary decade for the global capital markets.

Capturing this return didn’t require much effort on the part of the investor. All they had to do was to invest, stay invested and try not to be dead.

And for me? Well, I spent the first three years of the decade in some sort of career wilderness. Still, the 2010s was the decade that turned the unemployed to an employer. This month, we welcome our 21st crew member to the business. If anyone would have told me a decade ago we’d be here today, I’d only have asked ’Behold’ if the LORD would make windows in heaven, might this thing be?’

There’s a quote attributed to Bill Gates: ‘most people overestimate what they can do in one year and underestimate what they can do in ten years.’ I have no idea if he said it or not. But it rings true, not just in terms of our expectations for our personal lives, but also for the capital markets.

People overestimate the impact of market returns in any single year and underestimate the cumulative power of returns over a decade on their overall financial plans.

We obsess over what returns are going to be this year or next. But we forget the amazing power of compounding that happens over a decade.

You don’t have to look very hard to see any number of things that didn’t work out quite so well in the last decade. The economy and society at large face countless problems, some of which may appear existential, especially if you listen long enough to economists. But if empirical evidence is anything to go by, we can take courage in our ability, as individuals and as a society, to overcome these problems.

The late Swedish physician Han Rosling encourages us all to be a possibilist, which he describes as ‘someone who neither hopes without reason, nor fears without reason, someone who constantly resists the overdramatic worldview. As a possibilist, I see all this progress, and it fills me with conviction and hope that further progress is possible. This is not optimistic. It is having a clear and reasonable idea about how things are. It is having a worldview that is constructive and useful.’