Another Lost Decade?

Recently, I read an article about how the decade of the 2000s was being compared to the 1930s and the 1970s.  Many people regard these decades (1930s and 1970s) as “lost decades” when it comes to investing.  The reason for this is the relatively low returns of the S&P 500.  However, to consider these decades “lost” implies that an investor would have been much better off placing their investible assets inside a buried coffee can.

Let’s look at the average returns of the S&P 500 for the:

1930s                                         -0.05%

1970s                                          5.86%

2000s (through 6.30.2008)            0.06%

If you are only looking at the S&P 500, the average returns of these three decades are very paltry.

Instead of having a portfolio of just the S&P 500 (all Large Cap stocks), what if the portfolio consisted of 50% Large Cap stocks (as measured by the S&P 500) and 50% Small Cap stocks (as measured by the CRSP 9-10), the average returns of the portfolio look much different.

1930s                                          5.57%

1970s                                           8.11%

2000s (through 6.30.2008)            4.48%

Those who say that the 1930s, the 1970s and now the 2000s are “lost decades” because of poor market returns do not understand the principles of diversification.   While we would like to see our portfolios increase at a consistent rate of 11% per year - no more, no less, but 11% - it is most important to remember that when we look at the relationship between risk and return, this will likely be the average if the portfolio strategy is given enough time.

1.  Invest for the future, not the present

2.  Diversify

3.  Be Patient

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