Bill Parrott |

Major League Baseball had a tough year in 1994 due to a strike by the Major League Baseball Players Association. The strike caused the cancellation of the World Series, the first time since 1904. It was a bad year for baseball and a lousy one for investors.

The U.S. stock market barely budged in 1994 as the S&P 500 returned a paltry 1.3%. Long-term government bonds fell 7.8%; emerging markets dropped 7.3% and Real Estate Investment Trusts (REITs) produced a small return of 2.7%. The commodity sector did well generating a return of 16.6%.[1] Sound familiar?

What made 1994 so frustrating was the previous year saw stellar returns from stocks and bonds. The S&P 500 returned 10.1% and long-term government bonds gained 13.2%.

What happened in 1994? Alan Greenspan and the Federal Reserve surprised markets by raising interest rates and Fortune Magazine called it the “Bond Market Massacre.”[2] The Fed Funds rate started the year at 3.04% and finished at 5.5%, an increase of 2.46%.

When markets do nothing, investors get antsy and suffer from boredom. When this happens, they make changes to their portfolio by chasing returns and pouring money into hot sectors.

In 1994 investors sold stocks and bonds because the Federal Reserve was aggressively hiking interest rates. A rising rate environment is not good for stocks or bonds.  How did the markets fare since 1994?

Investors poured money into the commodity sector because of its stellar performance. With a strong economy and rising rates, investors chased this hot sector. However, those who allocated money here made just 2.6% per year from 1994 to 2017, barely outpacing inflation. A $10,000 investment grew to $18,046[3]

Buying bonds when rates rise hardly makes sense, but if you purchased long-term government bonds in 1994, you made 7.4% per year through 2017. A $10,000 investment grew to $51,653.[4]

The S&P 500 returned 9.7%. A $10,000 investment grew to $84,091. From 1995 to 1999 the S&P 500 rose 144%![5]

REITs returned 10.4%. A $10,000 investment grew to $97,339.[6]

Today, investors are frustrated by the lack of performance with stocks and bonds. The stock market is puttering along, the bond market is falling, and international investments are trending down.  It feels like 1994 all over again.

Here are a few thoughts to protect yourself from doing something that may harm your long-term performance.

First, do nothing. Don’t chase returns. Don’t make dramatic portfolio changes. The best course of action, at times, is to let your portfolio find its footing. The long-term trend is still in force.

Diversify your accounts across sectors and markets. In 1994, international markets and U.S. Treasury Bills performed well. This year, small-cap stocks and growth companies are enjoying excellent returns.  

Buy bonds for your account despite rising rates. They should be included in your portfolio for safety and income.

Rebalance your portfolio on an annual basis. This will keep your asset allocation and risk level intact. It’s also a great way to automate the buy low, sell high strategy.

A financial plan is paramount if you want to be a successful investor. It will help you to stay focused on your goals.  It would be great to earn double digit returns every year, but it might not be necessary for you to achieve your financial goals. Most financial planning professionals use single digit returns when forecasting projections for their clients.

In 1995 the World Series returned, and Major League Baseball has been doing well ever since. I’m sure our global markets will be fine also. Play Ball!

But if we hope for what we do not see, we wait for it with patience. ~ Romans 8:25

July 10, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.



[1] Dimensional Fund Advisors 2018 Matrix Book.

[2] http://www.businessinsider.com/1994-federal-reserve-tightening-story-2013-1, Matthew Boesler, January 25, 2013

[3] Dimensional Fund Advisors 2018 Matrix Book.

[4] Ibid

[5] Ibid

[6] Ibid