The Lost Decade For Stocks?
Large US stocks (as measured by the S&P500 index) have declined an average of 0.
9% per year over the past 10 years.
That is an ugly decade.
Based on this many investors and people in the media have concluded that stocks are no longer a good investment, and that buy and hold is an outdated strategy.
We disagree.
It was indeed a "lost decade" for large US stocks, but not a lost decade overall for smart diversified investors.
Large US stocks did have a slightly negative performance, but there were plenty of other asset classes and investments that produced positive returns.
A truly diversified portfolio (with a mix of large company stocks, small company stocks, value stocks, bonds, international stocks, emerging market stocks, REITs, commodities, etc.
) would have resulted in an annualized return of about 5% per year over the past decade.
A 5% annualized return isn't great but it's not bad for a horrible decade with two bubble related crashes (tech stocks and housing).
What Caused the Lost Decade for US Stocks? The most recent decade had the worst performance in US history of any decade, even slightly worse than the 1930's which included the great depression.
A big part of the reason for the flat performance for US stocks over the past 10 years is the fact that the starting point of the last decade (January 1st 2000) was near the peak of the most overvalued market in US history (the technology stock bubble).
This was a time when the overall market was valued at double or more its normal valuations.
If you pick as a starting point an extremely overvalued market you can't expect to have great returns over the next 10 year period.
If you were to pick as a starting point two years earlier or two years later than January 2000 returns would be noticeably better than the 10-year returns.
The lesson here is to avoid investing into extremely overvalued markets (bubbles) and to expect lower future returns if you are starting from very high valuations.
Currently the US stock market is valued at about the long term average of 15 times (P/E ratio) expected current year earnings.
I think from here future global equity returns will be in line with the long term historical averages (8%-10%).
What are the possible bubbles or trouble spots to avoid now? I'm concerned about Chinese equities, the US bond market (especially long-term treasury bonds), gold, and commercial real estate.
How often do we have "lost decades"? What's the outlook now? We have never had two decades in a row of flat or negative equity returns.
If you look at rolling 10 year periods since 1871 there have been 13 periods of negative stock market returns (prior to the one we just experienced).
In every single one of the prior 13 times, the subsequent 10-year returns on stocks exceeded 10% per year, stocks performed significantly above their long-term average, and stocks produced more than double the returns of government bonds.
What are some lessons from the "lost decade" in stocks? 1.
Asset allocation and diversification are long-term strategies.
They work well at reducing risk and helping returns over long periods of time.
2.
Be diversified.
Over the last decade there were plenty of good investments and a truly diversified portfolio (of stocks and bonds and alternatives) produced good gains.
Don't forget about owning some bonds for stability, income, and diversification.
Many investors own a handful of US equity funds and they think they are diversified.
They are not.
By being truly diversified you may own some asset classes that lose money, but you are likely to own many that are profitable as well.
International stocks, emerging markets, value stocks, small stocks, bonds, commodities, and REIT's all performed well over the past decade.
What asset classes will perform best over the next 10 years? 3.
Dollar cost averaging and rebalancing still work.
These strategies add value to your portfolio over long periods of time.
They help prevent overinvesting in boom times.
4.
Save more.
When the overall market returns aren't good, the other way to grow your portfolio is through increased savings.
Increased savings and contributions into your portfolio during a weak market is especially smart.
Build some safety cushion into your financial plan just in case the financial markets are disappointing.
If you finally hit your "number" and retired at the end of 1999, you were in trouble.
5.
Keep your costs and taxes low.
This is especially important when overall returns are lower like they have been over the past 10 years.
In a booming market investors tend to forget about expenses and taxes since they are small relative to their bull market returns.
6.
Look forward not backwards.
Most investors chase performance and tend to buy high (whatever is hot) and sell low (whatever has already gone down a lot), resulting in horrible long-term portfolio returns.
Don't try to time the market and don't simply buy whatever has already gone up the most over the past 3 years like most investors do.
The fact that stocks were down over the past decade is no reason not to own them now, in fact it is a reason to own them.
Don't measure your portfolio against its all time high.
That's unrealistic.
9% per year over the past 10 years.
That is an ugly decade.
Based on this many investors and people in the media have concluded that stocks are no longer a good investment, and that buy and hold is an outdated strategy.
We disagree.
It was indeed a "lost decade" for large US stocks, but not a lost decade overall for smart diversified investors.
Large US stocks did have a slightly negative performance, but there were plenty of other asset classes and investments that produced positive returns.
A truly diversified portfolio (with a mix of large company stocks, small company stocks, value stocks, bonds, international stocks, emerging market stocks, REITs, commodities, etc.
) would have resulted in an annualized return of about 5% per year over the past decade.
A 5% annualized return isn't great but it's not bad for a horrible decade with two bubble related crashes (tech stocks and housing).
What Caused the Lost Decade for US Stocks? The most recent decade had the worst performance in US history of any decade, even slightly worse than the 1930's which included the great depression.
A big part of the reason for the flat performance for US stocks over the past 10 years is the fact that the starting point of the last decade (January 1st 2000) was near the peak of the most overvalued market in US history (the technology stock bubble).
This was a time when the overall market was valued at double or more its normal valuations.
If you pick as a starting point an extremely overvalued market you can't expect to have great returns over the next 10 year period.
If you were to pick as a starting point two years earlier or two years later than January 2000 returns would be noticeably better than the 10-year returns.
The lesson here is to avoid investing into extremely overvalued markets (bubbles) and to expect lower future returns if you are starting from very high valuations.
Currently the US stock market is valued at about the long term average of 15 times (P/E ratio) expected current year earnings.
I think from here future global equity returns will be in line with the long term historical averages (8%-10%).
What are the possible bubbles or trouble spots to avoid now? I'm concerned about Chinese equities, the US bond market (especially long-term treasury bonds), gold, and commercial real estate.
How often do we have "lost decades"? What's the outlook now? We have never had two decades in a row of flat or negative equity returns.
If you look at rolling 10 year periods since 1871 there have been 13 periods of negative stock market returns (prior to the one we just experienced).
In every single one of the prior 13 times, the subsequent 10-year returns on stocks exceeded 10% per year, stocks performed significantly above their long-term average, and stocks produced more than double the returns of government bonds.
What are some lessons from the "lost decade" in stocks? 1.
Asset allocation and diversification are long-term strategies.
They work well at reducing risk and helping returns over long periods of time.
2.
Be diversified.
Over the last decade there were plenty of good investments and a truly diversified portfolio (of stocks and bonds and alternatives) produced good gains.
Don't forget about owning some bonds for stability, income, and diversification.
Many investors own a handful of US equity funds and they think they are diversified.
They are not.
By being truly diversified you may own some asset classes that lose money, but you are likely to own many that are profitable as well.
International stocks, emerging markets, value stocks, small stocks, bonds, commodities, and REIT's all performed well over the past decade.
What asset classes will perform best over the next 10 years? 3.
Dollar cost averaging and rebalancing still work.
These strategies add value to your portfolio over long periods of time.
They help prevent overinvesting in boom times.
4.
Save more.
When the overall market returns aren't good, the other way to grow your portfolio is through increased savings.
Increased savings and contributions into your portfolio during a weak market is especially smart.
Build some safety cushion into your financial plan just in case the financial markets are disappointing.
If you finally hit your "number" and retired at the end of 1999, you were in trouble.
5.
Keep your costs and taxes low.
This is especially important when overall returns are lower like they have been over the past 10 years.
In a booming market investors tend to forget about expenses and taxes since they are small relative to their bull market returns.
6.
Look forward not backwards.
Most investors chase performance and tend to buy high (whatever is hot) and sell low (whatever has already gone down a lot), resulting in horrible long-term portfolio returns.
Don't try to time the market and don't simply buy whatever has already gone up the most over the past 3 years like most investors do.
The fact that stocks were down over the past decade is no reason not to own them now, in fact it is a reason to own them.
Don't measure your portfolio against its all time high.
That's unrealistic.
