"The Lost Decade"

[Retire Soon]

We could be in for another "Lost Decade" in the stock market. Yesterday's S&P 500 Index closed at 1352.99 which is below the 1362.8 it finished in April 1999. Even when dividends and inflation are factored in, the S&P 500 has risen only 1.3% over the past 10 years. For the past 9 years the index is down 0.37%, while the past 8 years it has lost an average of 1.4% a year. Over the past 200 years, the market has been disrupted by long stretches of negative returns only two other times which include the Great Depression and the 1970's. History could very easily record another "Lost Decade" if stock returns continue this pattern, according to an article in today's Wall Street Journal.



Stocks Tarnished By 'Lost Decade' - WSJ.com

 

[REWahoo]

Interesting. When I subtract contributions while I was still working and add back the withdrawals from my portfolio since retiring 3 years ago, my return for that "Lost Decade" is over 90%.

Imagine what it would have been if we had won the decade...

 

[maddythebeagle]

I think there was another thread on this recently....I suppose when you throw in a 40% correction like the late 90s in any time period, you can come up with results like this....I suppose it sucks for the people that did a lump sum investment around that time but most working people dollar cost average their paychecks...

 

[FUEGO]

Do a little sensitivity analysis on the starting date of your observation period. What if instead of using 1999 as the starting point of measurement, you were to use +- 3 years. Plug in 1996 and 2002 as starting points and then see what your return would have been.

Also, the article does a fine job at cherry-picking the SP500 index. Almost all the other major sectors/indices/slices of the market outperformed the SP500 over this period (as briefly hinted at in the article).

I thought the take away from the article was that periods of exceptionally high return are typically followed by periods of below average return because the high return years are "stealing" return (in the form of P/E ratio expansion) from the future low return years. If we have, in fact, suffered from a 10 year period of low returns (as the article suggests), then doesn't it follow that we should have average or above average returns going forward?

 

[Planit]

Lost Decade?

Why does the WSJ think the S&P 500 is the "stock market"? US stocks are what, 30% of world capitalization? The same article shows excellent returns for REITs, developing nations, developed country foreign stocks, and US small caps. A balanced asset allocation of 40% treasuries, 30% US large cap, 10% US small cap, 10% EAFE, 5% REITs and 5% emerging markets would have returned 7.5% per year, not 2.46%, over this period using their return statistics-- with far less risk than the S&P 500. In fact, losses in the recent correction would have been less than half that of the S&P 500.

I suppose if you invested only in large US stocks in a single lump sum in 1999 you might consider it a "lost decade". But who does that?

 

[ats5g]

Do a little sensitivity analysis on the starting date of your observation period. What if instead of using 1999 as the starting point of measurement, you were to use +- 3 years. Plug in 1996 and 2002 as starting points and then see what your return would have been.

Also, the article does a fine job at cherry-picking the SP500 index. Almost all the other major sectors/indices/slices of the market outperformed the SP500 over this period (as briefly hinted at in the article).

I thought the take away from the article was that periods of exceptionally high return are typically followed by periods of below average return because the high return years are "stealing" return (in the form of P/E ratio expansion) from the future low return years. If we have, in fact, suffered from a 10 year period of low returns (as the article suggests), then doesn't it follow that we should have average or above average returns going forward?

eh, not necessarily. See Bogle's speeches:

What's ahead for stock and bonds

A new era for corporate america, for mutual funds, and for investors

Just like the 80's + 90's had higher stock returns, we could see low stock returns for the next 10 years.

 

[DblDoc]

CNBC had a brief interview today with Bogle about this article. He agreed with the content. His take home message: Expect modest returns in foreseeable future, likely better then last 10 years but not stellar. Continue with a diversified portfolio of low cost index funds and bonds.

DD

 

[audreyh1]

Well, my balanced portfolio WAAAAAY outperformed their cherry picked situation over the same time period, so I don't feel lost at all.......

Audrey

 

[ziggy29]

This whole concept of "lost decade" is twaddle. It's only true for people who put ALL of their equity eggs in the large cap U.S. basket.

Almost anyone who put a considerable amount of their portfolio into other equity classes like value, small caps, international (domestic and emerging) and REITs is much, much better than "running in place."

With the help of small caps, REITs, internationals and a smattering of gold mining stocks (less than 4% in gold), here are my returns for the decade using primarily index funds and ETFs in various asset classes (with about 70-75% in stocks most of the time):

2000: +0.7%
2001: -1.8% (the S&P 500 was down 11%!)
2002: -5.4% (the S&P 500 was down 22%!)
2003: +27.2%
2004: +15.6%
2005: +8.0%
2006: +18.6%
2007: +2.7%
2008 (YTD as of close on 3/25/08 ): -4.2%

That's an overall gain of 73.35%, or about 6.9% annualized including 2008 YTD (it's 7.69% if you look at 2000-2007). $100000 on 1/1/2000 became $173,350 today. Not world-beating, but far better than the sensational financial media would have you believe. This was with NO stock picking, just sticking with what I thought was a prudent allocation among about 10-12 asset classes (including about 22% bonds and 5% cash).

 

[TickTock]

That's an overall gain of 73.35%, or about 6.9% annualized including 2008 YTD (it's 7.69% if you look at 2000-2007). $100000 on 1/1/2000 became $173,350 today. Not world-beating, but far better than the sensational financial media would have you believe.

The WSJ article returns were inflation-adjusted. IIRC, annaulaized inflation for the last ten years is ~3.5%. So (1.069 / 1.035) - 1 = 1.033. 3.3% annual return after inflation. Still better than straight S&P500, but not as impressive. Does show the benefits of diversification, rebalancing, indexing, and low costs.

 

[Planit]

No Argument

I wouldn't be surprised if Bogle is correct about returns being lower for a while. It makes sense statistically. William Bernstein has been saying it for years (Efficient Frontier). I personally expect that, too, but also believe none of us can predict it with any accuracy.

But you're looking for an argument where there is none. My point was not that returns might not be stellar in the future, but that a diversified portfolio would have done far better than 2.46% with a lot less risk. The article should not have stated that "stocks" did poorly since 1999, but that the S&P 500 and DJIA did. I think you can see from the comments of those of us who did invest in multiple asset classes since 1999 that we are not unhappy.

By the way, I emailed the author, Jim Browning, and much to my surprise he responded. His response was "Very good point. If you read the whole article and looked at the charts, I'm sure you noticed that we pointed out that small stocks, REITs, commodities, gold and foreign stocks, including
developing-country stocks, all out-gained the S&P 500 since 1999."

 

[audreyh1]

My 2000-2007 performance (annual and total) was similar to ziggy29's.

I'm not convinced that inflation averaged 3.5% for 2000-2007. We went through some deflation during that time period.

Audrey

 

[Planit]

Inflation 2000-2007

My 2000-2007 performance (annual and total) was similar to ziggy29's.

I'm not convinced that inflation averaged 3.5% for 2000-2007. We went through some deflation during that time period.

Audrey

From the BLS website, January 2000 CPI was 168.8 and January 2008 was 211.08. That's an inflation rate of 2.83%.

 

[DblDoc]

I wouldn't be surprised if Bogle is correct about returns being lower for a while. It makes sense statistically. William Bernstein has been saying it for years (Efficient Frontier). I personally expect that, too, but also believe none of us can predict it with any accuracy.

But you're looking for an argument where there is none. My point was not that returns might not be stellar in the future, but that a diversified portfolio would have done far better than 2.46% with a lot less risk. The article should not have stated that "stocks" did poorly since 1999, but that the S&P 500 and DJIA did. I think you can see from the comments of those of us who did invest in multiple asset classes since 1999 that we are not unhappy.

By the way, I emailed the author, Jim Browning, and much to my surprise he responded. His response was "Very good point. If you read the whole article and looked at the charts, I'm sure you noticed that we pointed out that small stocks, REITs, commodities, gold and foreign stocks, including
developing-country stocks, all out-gained the S&P 500 since 1999."

Totally agree. Based on advice from here and diehards I hold a diversified, low cost portfolio and use conservative estimates on returns for planning purposes.

DD

 

[soupcxan]

I think some people here are missing the point of the article. Yes, it is overly simplistic to say "if you bought the S&P 10 years ago, you basically lost money" because most people have diversified more than that. However, how many people were buying REITs back in the 90s when tech stocks were in favor? How many people were buying gold funds when it was $200/oz? People who recommended gold during the tech-bubble were dismissed as crackpots. How many people bought energy funds when oil was $20/barrel? How about foreign currencies when the dollar was pounding the euro? How about inflation indexed bonds back when the "new economy" had "solved" the problem of inflation? Not only did you need to hold all these asset classes back when they were unpopular, you also had to be diligent about your rebalancing, which mean putting more money in these areas even when their returns were dismal compared to growth/tech stocks (or whatever the bubble of the week was back then). Hindsight is 20/20 - it's easy for someone to say today "oh this information doesn't affect me because I'm ultra-diversified" but if you looked at actual results, you would see that many people had failed to rebalance appropriately, or tried to market time a bit or chase hot asset classes, and as a result their returns would be lower.

I think the article makes another valuable point - we tend to assume that given enough time, stocks will always go up in value. That would be nice, but it is not written in stone. To me, 10 years is a fairly long time, so to get mediocre performance from a fairly diversified index like the S&P over that time frame tells me that equities may not always win, even over the long-term. The lesson here is for those who say "I'm young or risk-tolerant, so I should hold 100% equities" (and we have seen plenty of those people on this board). They are wrong. There is always a benefit to having some bonds in your portfolio when it comes to the risk/return tradeoff.

 

[al_bundy]

top story on kudlow today and they had Jeffrey Siegel to talk about it as well.

i'd expect a wharton professor to know that it's not the first time it happened. it's a regular cycle going back to the 1800's

 

[audreyh1]

From the BLS website, January 2000 CPI was 168.8 and January 2008 was 211.08. That's an inflation rate of 2.83%.

Thanks! That's closer to what I expected (was thinking more like 2.5%), and would give ziggy29 a real return of 3.95% after inflation - 3x the real return of the S&P example in the article.

I think that's pretty darn good!

Audrey

 

[RockOn]

90 day TBills outperformed the SP500 over the last 10 years. It does happen.

 

[TickTock]

Planit and audreyh1,

Thanks for correcting my recollection and doing the math!


On a separate note, has Bogle changed his stance on international investing? (He was against it. I think this is a blind spot, and probably related to another blind spot that I see. I intended to start a thread on this, but haven't gotten around to it yet.)

 

[Retire Soon]

E.S. Browning did not "cherry pick"

There is not much difference between the Vanguard Index 500 and Vanguard Total Stock Market over the past 9 years. The first column is the total return for Vanguard 500 Index Fund. The second column is for Vanguard Total Stock Market Index, and the third shows how much better or worse the Total Stock Market did than the Index 500.



(2007)-5.39% 5.49% .10%
(2006)15.64% 15.51% -0.13%
(2005)4.77% 5.98% 1.21
(2004)10.74% 12.52% 1.78%
(2003) 28.50% 31.35% 2.85
(2002)-22.15 -20.96% 1.19
(2001)-12.02% -10.97% 1.05
(2000)-9.06% -10.57% -1.51
(1999) 21.07% 23.81% 2.74

Vanguard Total Stock Market Fund did better by an average of 1.03%. This fund represents large, mid-cap and small-cap funds. I don't see that there would be much difference in a comparison of a large cap index and an index that represents small, medium and large cap companies. I believe that E.S. Browning gave an accurate portrayal of stock market returns and did not "cherry pick" returns. He probably chose the S&P 500 because its a more popular index. There was absolutely no intention of misrepresenting stock market returns.

 

[ziggy29]

There is not much difference between the Vanguard Index 500 and Vanguard Total Stock Market over the past 9 years. The first column is the total return for Vanguard 500 Index Fund. The second column is for Vanguard Total Stock Market Index, and the third shows how much better or worse the Total Stock Market did than the Index 500.

The problem is that the "total market index" funds tend to be cap-weighted and often contain 90% large cap or more. As such there is going to be very high correlation between the 500 and the total market index.

I don't think Browning "cherry picked" per se but is doing a disservice by focusing on *one* equity asset class when many people should own at least four or five of them (if not more) for diversification.

 

[Retire Soon]

Vanguard Total Stock Market (VTSMX) closely tracks the Dow Jones Wilsire 5000 index, which represents the broadest and most comprehensive index for the U.S. equity market. The breakdown for VTSMX is:

Giant: 41.76%
Large: 30.61%
Medium: 19.46%
Small: 6.13%
Micro: 2.04%


VTSMX Fund Portfolio: Investing - MSN Money

 

[innova]

As I'm sitting here reading this, I'm thinking to myself: "So what?"

Knowing this happened in the past, what should someone do for the future. The answer is always: Hold a diversified basket of stocks and bonds with low correlations to each other. Nothing has changed.

Good article by Swedroe makes this clear:
Bear Markets A Necessary Evil - Research

90 day TBills outperformed the SP500 over the last 10 years. It does happen.

yes, tbills bought lump sum 10 years ago outperformed SP500 bought 10 years ago. Fortunately, most of us have probably been DCA'ing in all along the way and this is irrelevant.

Not only did you need to hold all these asset classes back when they were unpopular, you also had to be diligent about your rebalancing, which mean putting more money in these areas even when their returns were dismal compared to growth/tech stocks (or whatever the bubble of the week was back then). Hindsight is 20/20 - it's easy for someone to say today "oh this information doesn't affect me because I'm ultra-diversified" but if you looked at actual results, you would see that many people had failed to rebalance appropriately, or tried to market time a bit or chase hot asset classes, and as a result their returns would be lower.

This is a phenomenal argument for passive investing. Don't market time, don't make predictions, just buy it all in a smart, low-cost way, and you'll avoid the trap the article discusses.

"Investing is simple, but not easy"
--Buffett

 

[Planit]

There is not much difference between the Vanguard Index 500 and Vanguard Total Stock Market over the past 9 years. The first column is the total return for Vanguard 500 Index Fund. The second column is for Vanguard Total Stock Market Index, and the third shows how much better or worse the Total Stock Market did than the Index 500.



(2007)-5.39% 5.49% .10%
(2006)15.64% 15.51% -0.13%
(2005)4.77% 5.98% 1.21
(2004)10.74% 12.52% 1.78%
(2003) 28.50% 31.35% 2.85
(2002)-22.15 -20.96% 1.19
(2001)-12.02% -10.97% 1.05
(2000)-9.06% -10.57% -1.51
(1999) 21.07% 23.81% 2.74

Vanguard Total Stock Market Fund did better by an average of 1.03%. This fund represents large, mid-cap and small-cap funds. I don't see that there would be much difference in a comparison of a large cap index and an index that represents small, medium and large cap companies. I believe that E.S. Browning gave an accurate portrayal of stock market returns and did not "cherry pick" returns. He probably chose the S&P 500 because its a more popular index. There was absolutely no intention of misrepresenting stock market returns.

Irrelevant comparison. Vanguard Total Stock Market is over 70% US Large cap, 99.7% US. You would have lost the benefits of developed foreign stocks, emerging markets, REITs and bonds, all of which outperformed the S&P 500 over that period.

And yes, Browning gave an accurate portrayal of US Large Cap stocks, but that's only 30% of the stock market. He agrees.

Regarding the comment about needing to buy unpopular stocks way back when, actually, you don't. You buy all the asset classes and hold all of them all them time. Rebalancing should actually be rare.

Hey, maybe there's a better way to invest. I hope you find it. But it helped me retire 15 years before my peers. Good luck.

 

[Planit]

Bogle and International

Planit and audreyh1,

Thanks for correcting my recollection and doing the math!


On a separate note, has Bogle changed his stance on international investing? (He was against it. I think this is a blind spot, and probably related to another blind spot that I see. I intended to start a thread on this, but haven't gotten around to it yet.)

My understanding (and this comes from Wiliam Bernstein, because I don't really care what Bogle thinks-- I respect him and love Vanguard, just don't care what his opinion on the market is) is that what he dislikes is UNHEDGED CURRENCY international investing. Doesn't like currency exchange rate risk. They certainly offer a lot of international index funds. I also recall that he hates international BOND funds-- don't think they offer those.