4 Amazing Facts about the 2010 Stock Market

Last Updated Jan 2, 2011 10:13 PM EST


By now, it's 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 I've 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 exactly 10 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 don't.

#3: Investors largely missed out on the stock market recovery
It's true that stocks are nearing an all-time high. It's 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 but rebalance 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 advisors timed the market exactly wrong.

#4: Current optimism is not justified
As I said, the year-end news was good for the US stock market. Does that mean it's time to run up the victory flag for 2011? I don't think so, but there are those who must think otherwise, since I've 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. That's 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.

Don't get me wrong, I'm not saying that there is no reason for optimism in 2011, nor am I saying that the market will tank. I'm just pointing out that after a 100 percent run up in the stock market, now might be an excellent 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 Can't Miss Financial Predictions for 2011
  • Allan Roth On Twitter»

    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

Comments