Fool TV: Diversification Rules!

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Hi, I'm Robert Brokamp, the lead advisor for the Motley Fool Rule Your Retirement service, and this is my "120" on the Lost Decade.

Now, you've probably heard the term "Lost Decade." It's meant to describe how the S&P 500 lost money from 2000 to 2010. But it didn't have to be the Lost Decade. Some people actually made money, and let me describe why.

First of all, that "Lost Decade" part: From 2000, where the S&P 500 began at about 1,450, to the beginning of 2010, where it ended around at 1,115, you're looking at a 23% loss. So you think, "Well, if I invested $10,000 in the S&P 500, I'd only have about $7,700 now." But that may not be true because you have to remember that the S&P 500 is a price index. It doesn't take into account dividends or dividend reinvestment. If you invested $10,000 in the S&P 500 through something like the Vanguard 500 Index Fund and reinvested all your distributions, you didn't make money but you still ended up with $9,000 -- and that's better than $7,700.

But the real lesson of the Lost Decade is not to invest in one type of stock or one type of asset class. While U.S. large-cap stocks did lose money (in fact, for that 10-year period, it was the worst 10-year period since 1926, including the Great Depression, according to Ibbotson Associates), other stocks did make money. U.S. small caps made a total return of about 50% over the decade.

Over that decade, U.S. micro-cap stocks made about 130%. When you look overseas at larger companies in developed countries, they made about 10% -- again, not a great return, but better than a loss. When you look at emerging-market stocks, they made about 150% total, real estate investment trusts about 170%, and then you having boring old bonds, which actually made a total return of about 80% over that decade.

So if you create a moderately allocated portfolio out of all these asset classes, including U.S. large caps, you'd have made about 65% over this so-called Lost Decade, turning your $10,000 into about $16,500.

Now, 2000 to 2010 was not a great decade, but it didn't have to be a Lost Decade. Keep reinvesting your dividends, stay very diversified, and if you'd like to see how I allocate my portfolios in my service, take a 30-day free trial to Rule Your Retirement. I'm Robert Brokamp, and that's my 120 on the Lost Decade.

Robert Brokamp's Recommended Diversified Portfolio

Asset Class

Representative Fund

Top Holding

U.S. large-cap stocks

Vanguard 500 Index (VFINX)

ExxonMobil (NYSE: XOM  )

U.S. small-cap stocks

Vanguard Small Cap Index (NAESX)

Human Genome Sciences (Nasdaq: HGSI  )

U.S. micro-cap stocks

Bridgeway Ultra Small Company (BRSIX)

America's Car-Mart (Nasdaq: CRMT  )

Developed-market stocks

Fidelity Spartan International Index (FSIIX)

HSBC Holdings (NYSE: HBC  )

Emerging-market stocks

Vanguard Emerging Markets Stock Index (VEIEX)

China Mobile (NYSE: CHL  )

Real estate investment trusts

Vanguard REIT Index (VGSIX)

Simon Property  (NYSE: SPG  )

Bonds

Vanguard Total Bond Market Index (VBMFX)

U.S. Treasuries

For more from Fool TV:

Robert Brokamp owns shares of the Vanguard 500, Vanguard REIT, and Vanguard Total Bond Market index funds. The Fool owns shares of China Mobile and has a disclosure policy.


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