Fear, greed, or ignore?

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We understand well the overall excitement and tendency toward concentration that characterized investors in the late 1990s. Returns on asset classes almost across the board were higher than their historical averages, but none more so than U.S. large growth stocks. And that’s where the money flowed.

Unfortunately, many investors have forgotten (or ignored) the lessons of the past or were too young to have the perspective to draw on at a time when it might prove useful.

Here’s a perspective to consider today:

It’s reasonable to consider the 1928-2/2009 returns as the long-term “expected returns” for each asset class since it covers over 81 years of market data. You may wish to raise or lower your expectations, but here’s what I see in these numbers:

  1. The S&P 500 annual return since the beginning of the stock market recovery in 2009 is 83% higher than its historical average, while the returns for US large value and US small value stock are “only” 45% and 14% higher, respectively. 
  2. The returns for US large and small value stocks have been outstanding on an absolute basis even though they’ve trailed the market by a relatively small margin (and nothing like the differences from 1995-1999).

Now here are some questions I ask myself.

Question 1: Are these returns likely to revert back to their averages at some point and, if so, to what degree will it impact each asset classes’ future return?

Question2: What is most likely to result in a bad market timing move now, moving more of my assets into large growth stocks (the S&P 500) or moving more into large and small value stocks? (By the way, the same question can be asked of US versus foreign stocks today.)

Question 3: If I own a higher percentage of large growth stocks (say, via a total market or S&P 500 index fund) in my portfolio than I should—given my personal long-term risk and return objectives—should I begin to diversify out of some of those shares and build in more balance in my portfolio among the other asset classes? (Also, how should capital gains taxes be considered in this scenario?)

Question 4: Would I be better off in the long-term to set a specific balance of these three asset classes that reflects my risk and return objectives and then occasionally rebalance to those targets, rendering these other questions irrelevant? In other words, would better balance among the asset classes avoid the high risk and cost of market timing?

Question 5: What am I going to do with all the time and emotional currency I save not worrying about short-term returns and market timing?


1. Dimensional US Large Value index 1928-2/2009. Russell 1000 Value Index 3/2009-9/2019.

2. Dimensional US Small Value index 1928-2/2009. Russell 1000 Value Index 3/2009-9/2019.

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