4 amazing facts about the 2010 stock market

8/3/2019 4 Amazing Facts About the 2010 Stock Market

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4 Amazing Facts about the 2010 Stock Market

By Allan Roth| Jan 3, 2011

By now, its common knowledge that 2010 was a good year for stock investing. There are some facts

that are not so common knowledge, and may even shock you.

#1: The US stock market is near an all-time high

Would it surprise you to hear that the US stock market closed the year within 10% of its all-time high

on October 9, 2007? It probably would, because we tend to think of the US stock market in terms of

the S&P 500 index, which is nearly 20 percentage points behind that all time high. As Ive noted

before, however, that index excludes both dividends and the 30 percent of the stock market comprised

of mid and small cap stocks, which were the strongest performers.

As measured by the broadest US stock market index, the Wilshire 5000, we are exactly10 percent

below that all-time high.

#2: US Stocks outpaced International stocks

In spite of all of our current economic woes and huge budget deficits, US stocks still managed to

outpace the rest of the world with a 17.9 percent return. International stocks, on the other hand,

earned only 13.2 percent, when measured in US dollars. Emerging market stocks far outpaced the

returns from developed countries, but only slightly bested US stocks.

Is it rational that US stocks could keep pace with emerging market countries with budget surpluses?

Before you say no, remember that outpacing the market means that you know something other

investors dont.

#3: Investors largely missed out on the stock market recovery

Its true that stocks are nearing an all-time high. Its also true that a balanced portfolio of 60% stock

index funds and 40% bond index funds is far above that all-time high. This is especially true with some

annual rebalancing.

Unfortunately, investors did anything butrebalance over the past three years. When the crisis hit, the

typical reaction was to panic and head for the proverbial hills. Since the 2008 market plunge,

individual investors took funds out of stocks at astonishing levels, and they were not alone. Even fee-

based advisorstimed the market exactly wrong.

#4: Current optimism is not justified
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As I said, the year-end news was good for the US stock market. Does that mean its time to run up the

victory flag for 2011? I dont think so, but there are those who must think otherwise, since Ive seen

dozens of 2011 stock forecasts and they are almost uniformly optimistic. Yet, I also noted back in early

2009 that stocks were cheap but no one was buying. Thats because the forecasts back then were

uniformly pessimistic.

The US stock market has more than doubled from that 2009 bottom, and individual investors are

starting to come back into the market. This optimism after a great bull market is as predictable as our

pessimism when valuations are low. Both lead to systematically buying high and selling low, and both

are detrimental to building our nest eggs.

Dont get me wrong, Im not saying that there is no reason for optimism in 2011, nor am I saying that

the market will tank. Im just pointing out that after a 100 percent run up in the stock market, now

might be anexcellent time to rebalance. And proper rebalancing requires reducing stock exposure.

More on MoneyWatch

2010 Stock Market Returns - The Numbers

2010 Stock Market Returns - Actual or Associated Press?

5 Cant Miss Financial Predictions for 2011 More recent post

Older post

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1

Eric Schurenberg

01/03/11 | Report as spam

RE: 4 Amazing Facts about the 2010 Stock Market

Great post, Allan. January is a great time for rebalancing: Those

year-end statements are in (if you still get paper), mutual fund

distributions have all been distributed and reinvested, and your

in a frame of mind to get ready for a new year. As always,

though, rebalancing means doing the hard thing--selling the

winners and buying the asset (this year, it may well be bonds)

that all the pundits say is doomed.

2
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3/8

Allan Roth



Eric,

Thanks - rebalancing is simple but not easy. We have to accept that we really don't know the future

and neither do the experts. It's frightening to accept that.

Happy New Year!

Allan

3honda77



Allan.

Just a note to let you know that the comments on the "2010 Stock market returns" are not readable.

Walt

4

Nunnzo



Hi Allan,

Regarding rebalancing, could I just direct future contributions into the underperformong asset class in

order to bring me back in line with my asset allocation target?

In 2011 we will be making contributions to our 403b, 457 and Roth IRA's. Our equity side is way more

than our bond position, so I was just going to direct future contributions into the bond index.

Thanks


4/8

5

cindykottke



finally rebalancing, I sell some vangard stocks, buy some bonds, put some money in CD's,wait for

Vanguard to have it's international index fund then buy that, put more money into the 401k at work,

shop the low hanging fruit and have some fun, Am I close? Thanks Allen my Dad would be so proud of

you and now me for listening to you,Cindy

6

Allan Roth



honda77,

For some reason, the comments on the 2010 blog are only readable using Firefox and not MS Explorer.

I've made Moneywatch aware. Thanks.

Allan

7Bobat313



The S&P vs Wilshire 5000 thing is a real pet peeve of mine. Even supposedly high tone operations like

NPR broadcast the stupid DOW, stupid NASDAQ and slightly less stupid S&P dozens of times a day and

never mention the broad market. Even this site is a culprit. The S&P is useful for academic studies

looking at the past, but the "average investor" needs to incorporate the Wilshire, not the S&P, into

their mental landscape, but the media makes it hard.

8

Allan Roth




5/8

Nunnzo,

You are correct - In the accumulation mode, the best way to rebalance is to direct new money into the

underperforming asset class. If the market moves too fast, however, you may also need to move

funds.

9

Allan Roth



cindykottke,

You summed it up beautifully in one concise paragraph. Great job!

Allan

10

Swifty Swift



Allan:

Thanks for an excellent piece.

One quick question. Doesn't the non-reform of the financial industry make you queasy about a 60%

allocation to stock index funds?

All the ingredients for the next huge financial crisis are still there. Glass-Steagall has still not been re-

enacted. Mind-boggling bonuses on Wall Street encourage (in fact, almost mandate) making reckless

bets with mountains of other people's money.

What are your thoughts?

Swifty Swift

11


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4 amazing facts about the 2010 stock market

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