The Wall Street Journal calls the past nine years as the ‘lost decade’ for stocks:
The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.
The Standard & Poor’s 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm, according to Morningstar Inc. For the past nine years, it has fallen 0.37% a year, and for the past eight, it is off 1.4% a year. In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over.
Despite the breast-beating the Journal column has generated (one pundit told a local radio station that stock returns will be terrible in the near future), a little perspective is needed. How many investors came into an inheritance precisely in April 1999, invested every penny in the S&P 500 and cashed out entirely on March 18, 2008? If so, how about writing a column on how great stock investing has been in the five years since March 2003 during which time the S&P is up more than 50% not counting dividends? It’s meaningless to pick arbitrary time periods and making conclusions one-way or the other.
It is entirely predictable that after years of sub par returns the ‘long term’ has come to mean a time frame of nine years. It is also an encouraging sign because the more investors throw in the towel and the lower stock valuations get in the near-term, the better stock returns will turn out to be in the time frame that matters: the really long-term of two decades or more.
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16 responses so far ↓
1 Yves // Mar 26, 2008 at 10:33 pm
CC,
I have been thinking for some time now to move some of my RRSP holdings into the RBC’s US Index Fund. Since inception(almost 10 years) the fund return is around -1%. I am in my late 20’s and have many years to ahead of me. Do you think this would be a wise choice?
2 WhereDoesAllMyMoneyGo // Mar 26, 2008 at 11:11 pm
There was a very famous cover on Business Week Magazine back in the 70’s which ran, “THE DEATH OF EQUITIES” for somewhat similar reasons (poor performance over the decade, but you’ll see there were some other things of note as well).
Here is a link to an interesting article that explores that Business Week article - even more interesting is that the review article was written about 10 years ago.
http://www.fiendbear.com/deatheq.htm
3 Mac // Mar 26, 2008 at 11:35 pm
During times like these I tend to pull out my copy of “Stocks for the Long Run” by Jeremy Siegel. You realize that when articles such as this one start to appear, it might be a good time to throw some money into the index.
4 Andy // Mar 27, 2008 at 3:05 am
The key here is continue investing. If you invest a lump sum of money in one shot in 1999 then yes, the return is very low. However, if you continue investing through the 2004, you are most likely to come ahead because of dollar cost averaging.
5 Ben // Mar 27, 2008 at 8:04 am
Yves, I also am in my 20’s and have a long horizon to retirement (couple of years anyway ;-)). I am a believer in index funds, and also believe that as the world’s largest economy, the US should be part of my portfolio. With respect to the poor performance of the fund you mention, keep in mind that international funds have been exposed to significant currency exchange exposure in the last decade. The US dollar in particular has dropped about 28% in the last decade against the Canadian dollar - that has an equal negative effect on the returns of any US index fund that is not currency-neutral. The inverse could easily be true in the next decade, with a return to historical US/Canada exchange rates plumping up returns nicely.
I agree that it is completely ridiculous to look at one particularly bad 9-year period and declare “Woe is me.” Too easy to twist any short period of time to suit the prevailing mood of the day, which is decidedly negative these days. I am fortunate that my retirement is decades away, but do empathize with those nearing retirement who were only just recovering from 2001 tech bust only to face this latest correction.
When the market goes down, counter the herd and buy.
6 Michael James // Mar 27, 2008 at 8:22 am
I find that cherry-picking time periods is a favourite tactic of many commentators. It is almost always possible to find a time period that supports a strange theory.
7 Kris // Mar 27, 2008 at 10:17 am
Articles like this should be forced to do a sensitivity anaslysis on their start/end dates - to avoid cherry picking bubbles. The information would be more valuable albeit less shocking.
8 Canadian Capitalist // Mar 27, 2008 at 10:24 am
Yves: I personally have 22.5% allocated to US equities and since I started investing in 2000, the returns have been very poor: first it was the market crash, then the appreciation of our dollar. But that’s the way it goes. I’m just sticking to the target and ’staying the course’ as Bogle would say.
Preet: We can add the Time magazine cover ‘Home $weet Home’ to the list as it seemed to have marked the top of the housing boom. (Link)
I also find it interesting that Buffett warned in a 1999 Forbes article about low stock returns due to the high valuation.
9 onarock // Mar 27, 2008 at 12:07 pm
“the really long-term of two decades or more.”
I don’t have this long of time………….
k
10 Pharmadaddy // Mar 27, 2008 at 1:00 pm
If I had invested even a lump sum of $4000 in my current portfolio on April 1, 1999, it would have gained almost 16% per year, and that is with 90% of it in equities. And that’s only over 9 years. Plus, like other commentators have mentioned, you only go to the supermarket when prices are lowest, not when they are exorbitant. Now, if anything, is a time to buy, not a time to panic and run.
11 Cheap Canuck // Mar 27, 2008 at 1:13 pm
I see this time period as a tremendous buying opportunity. But I have 25-30 years until I start tapping into my portfolio for income. If my timeline was 5-10 years I might be pretty nervous about buying equities in the current environment.
12 Pharmadaddy // Mar 27, 2008 at 1:33 pm
Allow me to add to my previous comment. Just for an intellectual exercise, I looked to see what would happen had I invested $4000 per month in my current portfolio starting April 1, 1999 (I could in no way afford that, but luckily Globefund.com allows me to see what would happen; besides, a percentage is a percentage). Having made regular contributions instead of a lump sum contribution, my annualized return would be a respectable 7%, which is a number I have based many of my retirement calculations on anyways, so I am happy with that!
13 Calin // Mar 27, 2008 at 1:52 pm
I don’t want to start a debate between “true believers” and “infidels” on this issue, but the message (in my opinion) is that the last decade meant turbulence with limited rewards, if any, for the average investor (big or small), with a special “bonus” for Canadians/Europeans that bought US securities (in USD; 1 Euro was 0.89 USD just a couple of years ago).
“Long term” is a fuzzy concept even for indexes (forget individual stocks: the once-mighty Nortel is a pre-split 50-cent stock now); life (as in marriage, divorce, death, illness, children, relocation, job loss etc.) often means unexpected expenses at unplanned moments.
Yes, the stock market has opportunities but the expectations might still be too high while underestimating the risks (and North-America averages from the past might be less relevant in a world where the US dollar won’t be down the road what it’s been after WWII).
14 Neil // Mar 27, 2008 at 2:26 pm
I had a a lump of money invested in 1997. It’s returned approximately nothing since then. This obviously colors my experiences, but I find a lot of the talk about equities being the best returns over the long term suspicious. After all, we only have what, 90 years of experience? In any other field, like weather forecasting, this would be a laughably small ‘n’ to base predictions on.
15 Canadian Capitalist // Mar 27, 2008 at 3:27 pm
onarock: It depends on what your target is. If it’s retirement at 65, your time frame might still be 20 years or more. IMO, assuming, you have a suitable allocation of equities, it still makes sense to have a portion of that in US stocks.
Calin: I agree that expectations for double-digit equity returns are not reasonable going forward. Low returns of the order of 7% are more likely but that’s still generous considering bonds are yielding as low as 3.5% today.
Neil: I truly believe in holding a diversified portfolio holding many asset classes, keeping down costs and controlling our emotions. I simulated investing $1,000 in 1997 in a portfolio similar to the Sleepy Portfolio and plugged into this calculator (Link) and the results show an average return of 7.1%.
16 Phil S // Mar 28, 2008 at 9:07 pm
While the index may not have moved much between the two points of measure in the index, anyone would have to admit that the composition of the index has had some major “churn”. During the dot-gone bubble, I think Nortel made up 30% of the index. Before that, Bre-X was a TSE300 large cap stock as well before it imploded.
I’m not a fan of indexing, but it looks like I will have to accept a few index funds in my pension plan as I am about to begin a new job with a defined contribution plan. For choices, the pension plan only has some index funds and some fund-of-funds available to invest in… Poor choices in my opinion, but at least the index funds have low MERs and since the employer kicks in a good 50% on top of what we put in, it’s kind of like an immediate 50% ROI. That part’s kind of a no-brainer.
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