Sunday, January 30, 2011

Is the "Lost Decade" Over?

The 10-year period from 2000-2009 has been referred to as the Lost Decade. During these years, the 10-year average annualized return of the U.S. equity market (as measured by the S&P 500) was -1% (-0.95% to be exact). A $10,000 investment on Jan. 1, 2000, was worth $9,089 on Dec. 31, 2009.

To put this performance into perspective, there have been 75 consecutive 10-year periods (rolling decades) since 1926. The average 10-year average annualized return for the S&P 500 over those 75 periods was 10.8%. (Raw performance data obtained from Morningstar Principia.)

Still, the Lost Decade was only lost if you were 100% invested in large-cap U.S. stocks. In fact, the last 10-year period was one of only four such periods since 1926 in which the S&P 500 produced a negative 10-year average annual return. The other three periods were 1929-1938 (-0.9%); 1930-1939 (-0.1%); and 1999-2008 (-1.4%).

--Lost and Found by Craig L. Israelson (Financial Planning, October 1, 2010)

When I looked at my clients' statements after the dismal second quarter of last year, it was truly disturbing. This wasn't the way things were supposed to work. I've been doing this work for over 30 years and I always said, "If you have your money invested for ten years or more, it is highly unlikely that you investment will be worth less a decade later."

This hasn't happened unless there was a depression as during two earlier periods in the 1930s. Two factors: 1) untempered optimism while the market was rising and 2) startling events like 9/11 and gracefully named "credit crisis."

Similarly, if someone had said in early October of 2008, when the economy was apparently close to a total collapse, that the S+P would rise by over 50% during the next 27 months, I would have been just as doubtful.

Anyway, it's nice to see the stock market rising over the last two years, and when you replace six months of poor performance in 2000 with six months of good performance in 2010, it makes the ten year performance numbers look much better.

My point is this: if you ask me what the stock market will do during the next year, my answer is likely to be "I don't know--and if you know someone who does know, don't invest with them."