Wednesday, April 28, 2010

What Lost Decade?

Much has been made of the so-called "lost decade" of investing during the period of 2000-2010. But what does the "lost decade" mean? Is it true and does it even matter?

The idea behind the lost decade is that investors either made no money or lost money over that period a 10-year period. After all, the point of investing is to make money and build wealth, so if you spend a decade of your life not meeting your objective, then it is a lost decade.

The claims of "the lost decade" are mostly leveled at "stocks", and usually by someone selling something that isn't stocks.

Gold is a shining example, if you'll pardon the pun. It's seems to be pushed as the only safe investment everywhere you turn. But is it really?

I can show you a chart of the price of gold per ounce for the last 5 years and say it's one of the few things to gain money over the past 5 years. In fact, here's the chart:

What lost decade_price of gold_5_year_usd

Looks pretty good, doesn't it? In fact, the price of gold has just about tripled over the past 5 years. But would you want to put your retirement savings in gold?

Here's the price of gold over the past 30 years:

What lost decade_price of gold_30_year_o_b_usd

As you can see, if you had invested a sizeable chunk of your savings in gold around 1980, you would have seen it do just about nothing for over 20 years!

Now, I'm not saying that gold is a bad investment, but it isn't without risk and is therefore not the best place to keep the bulk of your savings.

What about the stock market?

Many gold bugs like to say that you lost money in the stock market over the past decade, while gold tripled in value. But is that true?

Here's a chart of the S&P 500 over the past 10 years:

What lost decade_S&P 500 -10 yr

As you can see, if you simply put your money in an S&P 500 stock fund or index fund, and left it alone you would have lost about 22% (NOTE: This is a chart of the index. Had you invested in an S&P 500 fund, you would have actually lost less than that due to dividends).

But the S&P 500 is only 500 U.S. large cap stocks. What about other stock funds?

If you had invested in the Vanguard Total Stock Market ETF (VTI), you would have gained roughly 27% (with dividends):

What lost decade_vti -10yr

Granted, that's only a 2.7% annualized return with dividends, but it's a lot better than the S&P 500, and not truly a lost decade... just not a hot one.

If you had invested in the Fidelity Small Cap Stock (FSLCX) fund, your money would have grown roughly 100% with dividends - that's an annualized return of 10%:

What lost decade_FSLCX -10 yr

Certainly not a lost decade. In fact, it's just about an "average" post WWII decade for stocks. Granted, the average for small cap is closer to the 20-22% range, but no lost decade here either.

Emerging markets were a hot area for the last decade. If you have put your money in the T. Rowe Price Emerging Markets Stock (PRMSX) fund, you'd have seen it grow 108% with reinvested dividends:

What lost decade_PRMSX -10 yr

Another 10.8% annualized return.

Bonds were another big performer for the opening of the century. The PIMCO Total Return A (PTTAX) fund would have grown your investment by 74% (with dividends), or 7.4% annualized:

What lost decade_PTTAX -10 yr

So, while gold has indeed been the champ over the last decade (returning about 266% over the period from 2000-2010), it is not without risk, and its returns over that time are not indicative of its historic, long-term return. Here's the takeaway:
Performance depends upon the period of time through which you measure it.

Here's a chart that shows the performance of the S&P 500 (without dividends) from 1981-2001 - the period during which the price of gold languished as shown in the 30 year gold chart at the top.

What lost decade_S&P 500 - 1980_2001

So, was 2000-2010 really a lost decade? It depends on where you look. For the S&P500 it certainly was. But for bonds, small cap and no doubt certain individual stocks it really wasn't. Stocks are often touted by financial advisors as being the best place to put your money "for the long term". Is 10 years really long term? Does it even matter? I mean, you can pick just about any 10 year period to match the performance you want to shine a spotlight on. The endpoints are largely psychological and subjective.

For example, I don't plan on retiring until sometime around 2040. Does it really matter what the performance was during 2000-2010? I mean, if that same performance occurred from 2005-2015, or 2008-2018 would anyone be making such a big deal about it?


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