Investing Lessons From The Lost Decade

Most investors are painfully aware that the past 10 years have been pretty dismal for the average Joe and Jane. The “Lost Decade” is aptly named, seeing as the S&P 500 wound up basically flat over that time, even as it endured several roller-coaster rides. As you might expect, some money managers destroyed an inordinate amount of wealth over the past decade.

Goodbye, money

According to a recently released report from Morningstar, one mutual fund complex was responsible for the largest fund-related destruction of wealth over the past 10 years. Janus Capital Group’s collective offerings experienced a 10-year asset weighted return of (negative) -1% a year from 2000-2009, which amounted to a loss of $58.4 billion. Much of this loss came in the 2000 and 2001 bear market when Janus’ growth-oriented funds were hit hard by the deflating of the tech bubble.

Of course, it may not be completely fair to single out Janus as a wealth destroyer. Fundholders at Putnam Investments didn’t fare much better, losing a collective $46.4 billion during the same time period. Alliance Bernstein lost $11.4 billion, while Invesco AIM lost $10.1 billion. And many Janus funds have since rebounded, performing rather well in the latter half of the decade under study. And while there’s no changing the amount of wealth that was destroyed by some fund families in the opening decade of the new millennium, there are a few important lessons investors can take away from these events.

Learning from the past

The biggest reason why Janus landed at the top of the money-losing charts was simple: During the late 1990s the shop was pretty heavily growth-oriented. Most Janus funds were heavily invested in technology stocks like Microsoft and Cisco Systems, which had a great run-up in the late 1990s but were slammed in the ensuing bear market.

That’s the danger in following trends too closely: eventually you’re going to be on the wrong side of the market. Janus got into trouble by betting too aggressively on high-priced tech names with little regard for valuation. Investors should exercise caution not to blindly chase performance or run after the hottest-performing investment just because it’s done well in the past. That’s a surefire recipe for disappointment, since investors typically arrive late to the party and miss most of the early gains. (Gold bugs, take note!)

Secondly, this is another lesson on the importance of diversification — not only between stocks and bonds or among market capitalizations and countries, but among fund families as well. Unless you’re tied into a single-fund-family retirement plan, make sure that your fund choices span across several fund shops.

Some firms tend to be more value-oriented and may invest in dividend-producing names like ExxonMobil and Procter & Gamble, while others pursue more richly valued, fast-growing stocks like Apple and Google. You want exposure to both types of stocks and multiple investment approaches, and the easiest way to accomplish this is to invest in a handful of different top-rate managers.

Lastly, when it comes to mutual fund investing, it’s not enough just to sock money away in a random fund and hope that it does well. History has shown that most actively managed funds don’t beat the market consistently over long periods of time. You need the best funds in the bunch — the ones that have the best odds of making you money over the long run.

This article was originally published as The Biggest Wealth Destroyer of the Past Decade on Fool.com.