Staying balanced through the crisis to present day

I believe that, as investors, we all deserve some applause. The past six years have been trying and volatile. In this very challenging environment, it hasn’t been easy to stick to your asset allocation or portfolio decisions. Vanguard has tried to be a voice of reason during this time, cautioning investors against chasing returns. Those who stuck to their plan were rewarded.

Sources: S&P 500 Index, MSCI All Country World ex USA Index, and Barclays U.S. Aggregate Bond Index (rebalanced monthly). Equities split 70% U.S., 30% non-U.S. Data provided by Barclays and Thomson Reuters Datastream, as of April 30, 2013.

Let’s review: As our chart illustrates, a well-diversified portfolio would have plummeted roughly 37% or worse as financial markets went into a tailspin from late 2007 through early 2009. In 2009, some very smart, prominent individuals in the investment community were convinced that because of low economic growth, we were going to have a new investment normal with an extremely poor outlook for U.S. stocks. These individuals suggested that the only way to regenerate stock market returns might be to, for instance, overweight emerging markets.

In the subsequent years, investors faced myriad concerns, ranging from hyperinflation to a wide rash of municipal bond defaults in California, to the fiscal crisis overseas and here on our own shores, as well as some fears prevailing even today that we may be in the middle of a bond bubble. Everything in the headlines was an added pressure to abandon a balanced, diversified portfolio.

Luckily, there were voices that explained why expected higher earnings in emerging markets and economic growth would not necessarily translate into higher stock returns and why California would  not be the next Greece. Still, standing firm despite the headlines proved a daily challenge that tested the nerves of many investors.

I know headline risk will always exist, but the good news is that investors who stayed with their original strategies were well rewarded for their patience and perseverance. If you were one of them, give yourself a pat on the back because the diversified portfolio we mentioned earlier, not only recovered, but also actually gained 23% on the original amount from the start of the period through the end of April.