The Lost Decade

The S&P 500 (SPY) opened for business on Jan 3, 2000 (the first trading day of the year) at 1469.25. It closed Wednesday at 1390.71.

According to an interesting article by Randy Forsyth at Barron's if you add in the dividends in would be break even. I'm not sure if that is exactly right but you get the idea. I've referred to this as a big round trip to nowhere.

Most of the article focuses on thoughts from Robert Arnott in which he reasonably concludes that double digit expectations are too high and that investors should plan on average annual returns of 6-7%.

(Click to enlarge)

If you've been reading this site for a while you know I generally agree with that conclusion and actually have been writing about this for a while. However, I think the article misses a crucial point which I tried to capture in the above chart with the spray can feature of the Paint program.

Going back to the numbers in the first paragraph and forgetting the dividends, the S&P 500 is down 5.39% this decade. However if an investor had the misfortune of getting scared out on December 31, 2002 and got back in one year later they would be down 25.13% decade to date.

The average annual decline per year this decade has been 0.67% but for anyone missing the best year of the decade the average annual decline jumps to 3.14%. I think this supports something I have touched on before about the risk taken in getting completely out of equities when things look bad.

If instead of being completely out an investor was simply a little defensive and instead of being up 26% with the SPX in 2003 they lagged and were only up 20% that year then decade to date they might be down 11.5%. This still fits the definition of lost decade but I don't think it is anywhere near as bad as being down 25%.

I've been bearish for ages but have also been plenty long, had a little more cash than normal and been hedged a little thus the risk has been lagging up a lot as opposed to missing it altogether which I think the above numbers show can be a huge game changer.

If you look at most decades I think you will see that most of the return comes from two or three very good years (the 1990s as an obvious exception) and missing them will blow you up. You might be able to make your plan work with 6% average annual returns but you gotta be there to get it.

Comments

[RKoo]

I have not read the study. Question: does the study assume that the investment is static for the whole decade? I.e., no additional buys or sells during the decade? This is not how my 401K investment works.

Also, the absurdity of the premise of the study is more apparent if applied to the Nasdaq. Since Nasdaq peaked at 5,000+ in April of 2000, by the logic of the study, Nasdaq is nothing but a horrible place to invest in the last 8 years --- we are still down by 50%. But this is only true if one did nothing but held the same position unchanged from Jan 2000 to now. Most people did not and would not do that.

[icandoitdon]

"Since Nasdaq peaked at 5,000+ in April of 2000, by the logic of the study, Nasdaq is nothing but a horrible place to invest in the last 8 years --- we are still down by 50%. But this is only true if one did nothing but held the same position unchanged from Jan 2000 to now. Most people did not and would not do that."

you're right. plenty of people bought at the top and sold at the bottom, losing 80% instead of 50%.

[postaldaytrader]

Fortunately, a lot of people diversify and didn't invest strictly in the S&P 500. Those of us that were also in small caps and foreign stocks didn't do so badly. Couple that with dollar cost averaging in 401Ks the decade wasn't that bad. I suspect retirees who held bonds in addition to the S&P 500, small caps, and foreign stocks, sold using dollar cost averaging also fared better than the S&P chart indicates.

[icandoitdon]

here is a link that discusses the shell oil executive's comment about $35-$60 oil prices. i believe this was during a Q&A and was not in his direct testimony.

www.mcclatchydc.com/ho...

[icandoitdon]

sorry....posted on the wrong blog