Is it a ‘lost decade’ or a rosy future for stock investors?
The market bears are bemoaning the “lost decade” that equity market investors have suffered since 1999. A 10-year period of no returns negates the argument that stocks are the best investment for the long term, they say.
The argument may not hold water, however: expand your investment horizon out just a few years more and “lost decades” turn into positive returns on stocks.
First, the pessimists' argument: For the 10 years through February of this year, the Standard & Poor’s 500 Stock Index, with dividends reinvested, has lost an average of 3.4 percent per year, according to data from Standard & Poor’s Index Services Group.
This is well below the average’s long term annual gain of 9.3 percent since January 1926 and a great disappointment to long-term investors, the critics argue.
Why this period?
Is this even relevant to a long-term investor? This exact 10-year period is an arbitrarily-selected period that starts right at the peak of a 17-year bull market, when “irrational exuberance” brought the market to an absurdly high valuation.
Extend the investment horizon out a few years and things change. In the 15 years through this past February the S&P 500 returned 5 percent per year, less than its long-term return but better than cash interest rates.
Investors should also note that it is deceptive to look at raw index numbers without accounting for dividends. Even if the index stands at 900 at one point and 10 years later is still at 900, an investor would have enjoyed a positive return due to dividends paid by stocks in the index.
The 1970's lesson
Accounting for dividend reinvestment belies the common misconception that we experienced a lost decade in the 1970's and early 1980's due to bear markets at the beginning and end of the period.
The Dow Jones Industrial Average fell below 1,000 in the early 1970's and didn’t regain that mark until the early 1980's. However, the S&P 500 returned almost 7 percent per year with dividends reinvested from the beginning of the first bear market in 1973 through the end of the last one in 1982.
Investors should not focus on headlined, arbitrary periods and instead look at their own goals. A 30-year-old has an investment horizon of as much as 60 years extending through retirement.
Someone about to retire still has to plan for as much as 30 years of retirement income. The best way to cope with inflation’s effect on that income is to invest in stocks.
The probability of a positive experience is quite good: there has not been a 20-year period of negative returns on the S&P 500 during its 83-year history.
Wharton School Professor Jeremy J. Siegel has used stock indexes from before the days of the S&P to calculate long-term returns on stocks since the early 1800's.
His research showed there has never been a negative 17-year period in stocks after adjusting for inflation. Bonds and cash have fallen behind inflation in many of those periods.
Savvy investors will always keep a cash or short-term bond hoard that will get them through a bear market, should they need spending money during that period. The rest of their money should be in stocks, growing at a positive long-term inflation adjusted rate.