Home > Uncategorized > Lost Decade… Or Not?

Lost Decade… Or Not?

December 24, 2012 Leave a comment Go to comments

A couple of years ago the financial press had great fun trumpeting the news that the US stock market was going the way of Japan, since it had returns of approximately 0% over the last decade. That “reporting” no doubt contributed to the many people who are still afraid of stocks despite their nearly 100% returns over the 2 years following 2009.

While researching an idea I saw a chart of the S&P 500 total returns over the last decade, as of this November. I quickly noticed a couple of interesting things for an investment made 10  years ago in 2002:

  • At the peak in 2007/2008, it would be up 80%
  • At the best prices of 2009, it would be down almost 12%
  • As of last month, it would be up 83%

So what was a lost decade only a couple of years ago is now an 83% gain. That’s a bit less than stellar since 7% returns should double your portfolio in 10 years, but it’s still a solid gain for a decade with a lot of surprises. And of course dollar-cost averaging and rebalancing could also contribute to higher returns, even without counting the potential for those who recognized the lows before 2002 and in early 2009 and bought in.

It all depends on the timing. The “lost decade” idea was a result of using the peak of the tech bubble as a starting point. Obviously anyone who invested a lot in that market would not do well. I wasn’t active at the time but my investment policies are designed to always move away from overpriced markets and avoid that type of situation.

Even if we do get caught buying at higher valuations it’s not a big deal because calculating 10-year returns like this depends on prices from only 2 days. If we invest the same amount every month, the amount we put in during the worst month will be 0.8% of what we invest that decade. Since we try to increase the amount we invest every year, a true lost decade would mean we actually put in more during the years when we get better prices. We should be so lucky!

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