Pessimism Isn't Profitable

There has been plenty to worry about as an investor over the last 10 years.  But acting on these concerns hasn’t gotten you very far.  

The chart below tracks the growth of a hypothetical, $1M investment in a globally diversified stock portfolio (Portfolio 1, the DFA Equity Balanced Strategy) and gold (Portfolio 2, GLD–the Gold ETF) from October 2009 through September 2019.  Adjusted for inflation, you’ve more than doubled your money in stocks with a return of 8.4% per year above the Consumer Price Index.  In gold, you have barely held on to what you started with; net of inflation you’ve earned just 1.7% per year.

This spread between stocks and gold over the last decade isn’t as wide as it had been over the previous 35 years–from 1975 (the first year it was legal to own gold) through September 2009, the DFA Equity Balanced Strategy Index beat inflation by 11.9% per year, while gold barely outpaced inflation at all earning just 0.8% per year more than inflation.  But the patterns are broadly similar.

Regardless of what the financial headlines might say, pessimism hasn’t been a profitable investment strategy.  Buying and holding a well-diversified stock portfolio has worked far better, and for those in retirement or needing ongoing cash flow, setting aside a few years of income in short-term bonds to spend when stocks drop temporarily is also a sensible strategy.  Trying to time the market or load up on portfolio “hedges” such as gold or other alternative assets that promise to perform well when stocks or the economy stalls will most likely cost you far more over time than just riding out the rough patches.


DFA Equity Balanced Strategy components:

Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.