Why the lost decade wasn't such a loss
Zeroing in on an arbitrary number - in this case 10 - can blind you to the short- and long-term gains that stocks have provided.
(Money Magazine) -- You've no doubt heard the term "lost decade" to describe what's happened to stocks since 1999. And that may have you wondering whether equities are worth the risk and whether buy-and-hold investing, dollar-cost averaging and dutifully contributing to your 401(k)'s mutual funds are a sucker's bet.
That's understandable. But what if I could show you that instead of losing ground, stocks have been rising modestly in recent years? In fact, what if it turned out that even with today's depressed prices, equities have been returning 4% annually - a modest sum to be sure, but better than cash nonetheless?
Rather than shun stocks, might you put new money to work in the market by rebalancing or by being a bit more aggressive than usual to take advantage of valuations approaching once-in-a-generation lows?
Then it's time to expose the fallacy of the lost decade.
Yes, it's true that the Dow Jones industrial average sits more than 1,000 points below where it was 10 years ago. But that's irrelevant to your investing strategy for three reasons. First, it's an arbitrary amount of time. We're hung up on it because 10, as University of California-Berkeley finance professor Terrance Odean notes, "is a nice round number we can all relate to."
Second, the market's performance over the past decade is a red herring because the period you're judging starts near the absolute pinnacle of irrational exuberance, when stock valuations - as measured by price/earnings ratios - were absurdly high. If you measure from the end of the last bear market, in October 2002 - when stock prices were still higher than average, by the way - you'll see that the Dow has returned 4.5% a year (including dividends) while the Standard & Poor's 500 index has gained 3.4% annually.
Third, as T. Rowe Price financial planner Stuart Ritter notes, "The only people the lost decade accurately applies to are those who invested absolutely nothing before the late 1990s, put all of their money in at the market peak and invested absolutely nothing ever since." If such an unlucky soul does exist, history suggests that he'll be rewarded. As the graphic shows, even money invested at a moment of high valuations - before the 1973-74 bear market - grew substantially over time.
None of this is to suggest that stocks will rebound tomorrow. Predicting short-term movements is a fool's errand. The point is that rather than obsess over how the market has done since a meaningless date, you should focus on the long arc of your investing effort.
The annualized long-term gain for stocks over the past 25 years stands at around 10% - despite last year's 30%-plus drop. Over the past 15 years, the S&P is up around 6%. That still beats bond funds and cash. Of course, to realize those gains you had to have stuck with your plan through the market's ups and downs. That's one more reason to look at the lost decade in a different light.
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