Throughout history, when bad news and events touched the daily lives of investors and caused nest eggs to shrink, it’s been natural to ask, “Is this the end of investing as we know it? Have new developments changed things so much that the old patterns no longer apply?”
These four stories should help illustrate an important investment principle: Markets have always gone up and down, sometimes in dramatic and alarming ways. For investors who have maintained diversified portfolios over the long term, the stock market has consistently provided a positive investment experience.
The 1980s had unique problems that proved as difficult as the previous decade. High inflation continued, pushing the US into a severe recession. Mortgage rates topped 20%, putting homes out of reach for many. Trouble in the economy drove homeowners into default.
This was the background to Linda’s first decade as an investor. Mortgage defaults caused widespread bank and savings loan failures. And 1987 saw the Black Monday crash.
Could Linda’s portfolio have survived these dramatic events?
Could Linda’s portfolio have survived? Yes, in fact it thrived, thanks to diversification and discipline. US small stocks climbed early, looking ready to repeat as the decade’s best asset class.
But Linda’s portfolio beat US small. International stocks, which limped along in the early years, took off later. Linda’s allocation helped drive gains in her portfolio.
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