By now, everyone must have seen numerous references to the Lost Decade in the financial media. The ten years just ending have been the worst decade for U.S. stocks in modern times, even worse than the decade of the Great Depression in the 1930’s.
From 2000 to 2009, the S&P 500 Index, which is made up of 500 of the largest U.S. publicly traded corporations, fell by 9.1% including reinvested dividends. The S&P 500 was not in existence in the 1930’s, but as a substitute, Ibbotson Associates reports that large cap stocks were down 0.5% including reinvested dividends in the 1930’s, so the decade just ended was actually worse in regard to large-cap stock investment returns than the decade that housed the Great Depression.
Let’s put this in perspective though. The term “Lost Decade” assumes that you started with a fixed balance on January 1, 2000 and did not save or invest anything for the next ten years. For example, an investor who simply invested in a global portfolio of 80% Vanguard 500 Index Fund and 20% Vanguard Total International Stock Index Fund lost 3% over the course of the decade. However, an investor who started with $10,000 in that same allocation but invested $1,000 per month in the portfolio split 80/20 between the two funds actually made money during the decade—over $15,400 for a return of 12%.
While these returns are nothing to write home about, the Lost Decade proved much worse for investors who gave up on their investments completely by selling at or near the bear market lows of October 2002 and March 2009.
Conclusion: it was not a Lost Decade for investors who stayed true to their investment plan through thick and thin and did not succumb to fear by halting their regular investment schedule or going to cash.
A 401(k) plan structure helps participants to become persistent investors by allocating dollars from every payroll as long as the participants don’t lose their way, stop contributing, or try to time the market. Automatically reinvesting your dividends and capital gain distributions accomplishes the same thing.
Even in the Lost Decade—which could not have been predicted—the disciplined practice of saving and investing regularly turned out to be a sound strategy, producing gains in a difficult environment.
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