Dot-com bubble

Well not exactly. No situation ever repeat itself perfectly. But there certainly can be similarities.

In the mid 1990’s a diversified portfolio under-performed the U.S. Large Cap Growth asset class. In fact they under-performed by substantial amounts.

The ‘dot com’ equity market was hot, very hot. Everyone wanted technology stocks. Money poured in. Enron was riding high. From 1996 to 2000 NASDAQ stock index went from 600 to 5000. That’s over a 700% cumulative return in five years. WOW!! Tech stocks were the only thing to won. It was called the new economy, a new paradigm. The world was changed forever.

Those that recommended and defended diversified portfolios were considered ‘old school’ or ‘out of touch’. Their portfolios underperformed and underperformed badly.

In fact, as I have written many times before. Warren Buffet at the height of the craze had shown a loss.

Below is an excerpt from a article by Jesse Colombo depicting the sequence of events.

By early 2000, reality started to sink in. Investors soon realized that the dot-com dream had devolved into a classic speculative bubble. Within months, the NASDAQ stock index crashed from 5,000 to 2,000. Hundreds of stocks such as Pet.com, which once had multi-billion dollar market capitalizations, were off the map as quickly as they appeared. Panic selling ensued as the stock market’s value plunged by trillions of dollars. The NASDAQ further plunged to 800 by 2002. One former high-flier, Microstrategy, slid from a lofty $3500 per share to a pitiful $4 per share. At this time, numerous accounting scandals came to light in which tech companies had artificially inflated their earnings. In 2001, the U.S. economy experienced a post dot-com bubble recession, which forced the Federal Reserve to repeatedly cut interest rates to stop the bleeding. Hundreds of thousands of technology professionals lost their jobs and, if they had invested in tech stocks, lost a significant portion of their life savings.

Needless to say, the New Economy theory was proven wrong and traditional economic principles still hold. What is sadly interesting is how bubbles will continue to occur in the future. When they do occur, foolish investors will continue to convince themselves that “this time is different!

Many investors with portfolios concentrated in tech stocks were decimated.

Today with the ‘Brexit” volatility the majority are avoiding international equities. The U.S. large stocks have been outperforming over the last couple of years. I assume that the Brexit subject has been around for much longer than the media has said.

That means that a globally diversified portfolio has underperformed for the last couple of years.

Will this continue? Will history repeat itself and international equities outperform in the near future? I have no idea. But I do know that over the long term a globally diversified portfolio will result in great results.

Find a fiduciary adviser/investor coach who will keep you disciplined to a globally diversified portfolio. And take the guess work out of your investing experience.

Try to ignore short term volatility.

Many times when I meet with investors I am asked ‘where is the best place to put my money?’ The financial institutions have taught investors that there is someone who can tell them what to do in every circumstance.

These institutions lead you to believe they know what you need. In fact these institutions sell you ‘product’ to feed your fear or hype in every environment.

A true advisor will often tell you things you do not want to hear. Remember if your advisor only provides the product you ask for. They are not an advisor but rather a salesperson or broker.

To succeed in investing being diversified means looking different.

Most investors are narrowly diversified into top performing funds or asset classes of the last five to ten years. They often feel diversified but aren’t.

To be diversified means including asset classes or types of funds in your portfolio that did poorly over the last five to ten years. If you do this, your portfolio will look and perform very differently from your neighbors’ or friends’.

Many of you may remember the mid to late 1990’s. Everyone was concentrated in U.S. Large Cap Growth funds and more specifically tech stocks or .com stocks. These were earning 30 to 35% per year during that period. At the same time a globally diversified portfolio was earning approximately 8%.

Investors were avoiding these diversified portfolios like the plague. All their investment dollars were in tech stocks or large cap growth. Because it was different this time…it was a new paradigm. Or so the ‘experts’ said.

When the tech bubble burst in 2000 these investors were devastated. In some cases losing 40, 50 even 60% of their value almost overnight. In fact, there were many dot.com companies that lost everything.

At the same time the globally diversified portfolio had a positive year in 2000. There of course is no guarantee that this will repeat. But the evidence is clear. A globally diversified portfolio at your level of risk will earn great returns over the long term.

What the tech stock investors did not realize is that they were gambling and speculating with their money and not investing.

Remember the equity markets are random and unpredictable. Getting rich overnight is although not impossible, is highly unlikely.

To succeed in investing you must own equities….globally diverisify …rebalance.