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Using Financial History to Put Things in Perspective

March 4, 2014

Here’s a paradox to share with clients: Investors who try to predict the future are bound to fail, and those who ignore the past are bound to make avoidable mistakes, the blog A Wealth of Common Sense says in a recent post.

Investors who fail to recognize that the stock and bond markets’ strength from the early 1980s to the mid-2000s was abnormal will be disappointed if a repeat doesn’t unfold, now that the financial crisis is behind us.

What’s more, the blog argues, investors nostalgic for that era forget how rocky the terrain was back then as the economy ricocheted from stagflation and high unemployment to Black Monday and a string of crises through the 1990s, into the new millennium. And while the crash of 2008-09 may be safely in the rearview mirror, now there’s uncertainty over Russian military action in response to the political crisis in Ukraine.

In the face of this barrage, investors need a process that holds up for the long term regardless of interim havoc. This can differ from 60/40 portfolio allocation as long as it matches an investor’s risk profile, personal situation and time horizon, according to the blog.

It comes down to the cyclical nature of markets, to paraphrase the blog’s quotes by billionaire investor Howard Marks, and recognizing that nothing produces profits forever. Financial advisors aware of historical trends can give clients context when analyzing whether to adjust portfolios, and can use broad diversification to protect clients when history starts to repeat itself.

By Chris Latham
  • To read the Wealth of Common Sense article cited in this story, click here.