Investing in the 80's

What can we learn from Investing in the 1980's? Will the same trends in the 1940's, 1950's and 1960's return in the 1980's?

The table below shows the performance of small cap stocks, large cap stocks, long term bonds, and short term bonds during the 10 year period of 1980 - 1989, as found in the book titled Investments by Bodie, Kane, & Marcus. During this period, interest rates and commodity prices returned to more normal levels. Did anyone make money during this period? What investment did the best?

If $1,000 was invested on January 1, 1980 here is how the numbers came out:

Small Cap Stocks = $3,250
Large Cap Stocks = $5,059
Long Term Bonds = $2,971
Short Term Bonds = $2,368

With the interest rates dropping, the return for stocks and bonds did very well. Large cap stocks came in first with small cap stocks & long term bonds essentially equal. The lower inflation rate helped stocks.

Below is a table of the value of the $1,000 investment at the end of each year.

Year /Small Stocks /Large Stocks /Long Bonds /Short Bonds
1980 /1,353 /1,325 /1,132 /1,116
1981 /1,459 /1,259 /1,173 /1,282
1982 /1,859 /1,537 /1,249 /1,420
1983 /2,500/1,881 /1,242 /1,546
1984 /2,150 /2,002/1,432 /1,700
1985 /2,769 /2,643 /1,900 /1,834
1986 /2,863 /3,129 /2,356 /1,947
1987 /2,464 /3,296 /2,293 /2,054
1988 /2,999 /3,852 /2,486 /2,186
1989 /3,250 /5,059 /2,971 /2,368

OBSERVATIONS:

1. Stocks had much less volatility than the 70's
2. Bonds did a better job of providing account balance stability
3. Stocks need to be held with a longer term perspective
4. You can not time the market
5. Stocks had more up years than down years
6. Long term bonds lost money 2 of the 10 years, so it is possible for a bond to lose money
7. Short term bonds never lost money in a year

The trends of the 1940's , 1950's, & 1960's returned for stocks in the 1980's. The lower interest rates and lower inflation rates of the 80's gave better returns than during the 70's. Thankfully, we are not in a high interest rate and high inflation period.

It is important to know what you want your investments to do and act accordingly. It is not possible to predict the future value of an investment and diversification can smooth out some risk.