Is this a ‘lost decade’ for investors?
From the start of 2000 through August the average annual return of the Standard & Poor’s 500 Index has been only 0.13 percent per year.
Not since the Great Depression of the 1930s have a decade’s returns been so bad. Following the Crash of 1929, returns in the 1930s were virtually nothing, despite years when the market climbed as much as 54 percent and fell by as much as 43 percent.
Long-term investors can withstand long declines in stocks, even when they stretch out over a decade, says Vanguard’s Chairman.
Even the miserable 1970s—a period of high inflation and economic adjustment to the end of the Vietnam War—yielded an annualized return of 5.8 percent for the U.S. stock market.Paltry returns
Although we aren’t sure how the decade will finish up next year, commentators are already bemoaning the “lost decade” and its implications for future returns, says John J. Brennan, Chairman of the Vanguard Group, one of the largest domestic mutual fund companies.
Although the pundits may once again proclaim the death of stocks, Brennan says the paltry 10-year returns are not a good reason to give up on investing.
Brennan notes that long-run returns usually “revert to the mean,” meaning they go up or down so that in the long run they cluster around an average.
For instance, an investor may have earned nothing in the stock market during the 1930s, but his return from then until now would be about 10 percent.
Meanwhile, an investor who earned a stunning 18.2 percent annualized return in the 1990s would also have an annualized return of about 10 percent if he had held on until today, Brennan writes.
Longer horizon
Brennan notes that although 10 years seems like a long time, most investors have much longer periods in which to invest.
A young worker, for instance, may be investing for as long as 70 years.
“That’s much longer than any quarterly earnings cycle… It’s longer than many publicly traded companies have been in business,” he writes.
He notes that those who are about to retire also have a time frame longer than 10 years.
“We don’t invest to retirement. We invest through retirement,” he writes. Although stocks can go through weak periods lasting as long as 10 years, the evidence suggests they remain the best vehicles for long-term growth, he added.