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Revisiting the Lost Decade of Returns

Written by: Corey Janoff

As we approach the end of 2019, we are nearing the ten-year anniversary of what was known as “The Lost Decade of US Stocks.”  That was the period of time from 2000-2009 when the S&P 500 produced to total return (including reinvested dividends) of negative 9.1%.  

By comparison, the Lost Decade was sandwiched in between two of the best performing decades in US stock history.  In the 1990’s, the S&P 500 index opened at 353.4 on January 2, 1990 and closed at 1,469.25 on December 31, 1999.  

For investors coming out of such a strong period of growth in the 1990’s, having a decade of basically stagnation was pretty disheartening.  We all know how these past 10 years have turned out.

On January 4, 2010 the S&P 500 index opened at 1,116.56 and as of October 3, 2019, it is sitting at 2,910.63.   No promises on how the year will end.   These last ten years have mostly made people forget that stocks don’t always go up.  

Looking back on the first ten years of the 21st Century, large US stocks struggled.  The decade started off with three straight years of negative returns! Negative 9.11% in 2000, minus 11.89% in 2001, down another 22.10% in 2002!  Dear lord!   

We all know what happened in 2008, when the S&P 500 fell by 37%.  But it basically landed on a trampoline in early 2009 and then got hooked up to a jetpack.  

2008 was the equivalent to a rough winter.  Ask people in Montana, North Dakota, or Minnesota what it’s like to get snow in September and still have snow on the ground in May.  That was 2008 for stock investors.  A rough winter.  You had to shovel your driveway more times than you cared to count.  Threw out your back during one of the shoveling sessions.   The roads had so much gravel and salt that your car was rusty by spring.  But summer came around and things were on the up and up.  

2002-2002 would have been miserable to invest through!  That was three straight winters, without any summer in between!  You just left the biggest party of the century and then went into a deep dark depression for the next three years.  Some people get seasonal depression when the days are short, and the temperature is cold.  Usually lasts about 3 months.  Imagine that for 3 years!  

Then, after you finally snap out of it and things are going well, 2008 comes along and punches you in the face and breaks your nose.  No wonder by the time the decade ended, US stock investors were questioning if it even made sense to invest in stocks moving forward.  A decade of whiplash with nothing to show for it.  

Were Returns in the 2000’s Really That Bad?

I decided to do a little digging.  We all know the S&P 500 had a rough go for the first nine years of this century.   But the S&P 500 only represents 500 companies.  Granted, they are more or less the 500 largest companies in the United States, represent about 80% of the total market capitalization and are a decent barometer of the overall stock market.  However, in the US alone there are about 4,500 publicly traded companies.  According to Investopedia, there are approximately 630,000 companies traded publicly worldwide.   

And these are only stocks!   What about bonds?  Or other investments, such as real estate investment trusts, or commodities/precious metals, or even cash?  

Did all of these investments also lose some value, or end the decade flat?

I turned to the investment research company Callan, who publishes their often-referenced periodic table of investment returns.  This table shows the returns of many of the major investment indices over the past 20 years, ranked based on their relative performance each year.   See below for the most recent version.   

stock returns

This doesn’t show the total return of any index for the time period illustrated – only the yearly returns from January 1 to December 31.  So, I took this data and organized it so I could calculate the total return in a given time period.  What did I find?

When adding up all of these numbers, large US company stocks was the only asset class that was negative during that decade!  Everything else on this table finished the decade with a positive total return.  See below.  

average stock returns

Diversify, diversify, diversify.  You hear it all the time.  This is why diversification is important.  You never know which asset class will do well in a given year, or over a given timespan.  

How Would an Actual Portfolio Fare?

What if we invested an actual portfolio in these asset classes?  Keep in mind, you can’t directly invest in an index, so the results I’m about to show you aren’t 100% accurate.  Also, if investment management or trading costs are factored in, along with timing of purchases and dividend reinvestments, results may vary.  But let’s take a look.

I went with $1,000,000 invested an 80/20 portfolio – 80% stocks, 20% bonds/cash.  No reason other than I felt like looking at that.  It’s a portfolio with a goal of possible long-term growth.  I invested the portfolio as follows:

investment allocation

This isn’t a recommendation for how to invest an 80/20 portfolio.  If you talk to ten different people, you will likely get ten different recommendations on how to allocate an 80/20 portfolio across the various asset classes.  Let’s not miss the forest for the trees here.  The specific numbers don’t matter.  Just go with the idea of 80% stocks, 20% bonds/cash, globally diversified.   

If we invest the money as follows, we end up with the below results.  

portfolio growth

By the end of 2002, your $1,000,000 was down to $788,255.  Lovely.  But I you didn’t bail and held on for just another year, you would have recovered three years’ worth of bleeding and made it back to even in 2003.  Your portfolio would have peaked in 2007 at $1.6M, came back down to $1.09M in 2008 and finished the decade at just under $1.4 million, for a total return of almost 40%.  

I understand a 40% total return for ten whole years of investing isn’t super exciting, but it’s a heck of a lot better than negative 9% if you only invested in large US stocks.   

What about Rebalancing the Portfolio?

You may have heard of the term “rebalance” before.  This involves adjusting your portfolio back to your initial target percentages periodically over time.  Why is this important?  If a particular investment does really well over a given time period, there is no guarantee that it will continue to do well.  And vice versa.  If a particular investment does relatively poorly over a given time period, there is no guarantee that it will continue to do poorly.  

By selling some of the position that did well and reinvesting the proceeds into a position that hasn’t done as well, you are effectively selling high and buying low.   There are no assurances that rebalancing will produce better results than a buy and hold strategy, but studies have shown that it is smart to rebalance.  

One of the popular studies by Vanguard suggests that rebalancing can add an average of 0.26% per year to a portfolio’s value over time.  0.26% doesn’t seem like a lot, but over a 40-year span that is an 11% difference.  That could be the difference between a $5M portfolio in retirement and a $5.55M portfolio.   It’s only $550,000 of additional money.   You decide if it’s worth the effort.   

There are numerous strategies for how to rebalance a portfolio.  Some people do it annually or semi-annually each year.  Some custodians even allow you to set up an auto-rebalance at your desired intervals (usually either quarterly, semi-annually, or annually).   

Other people rebalance as needed when the portfolio gets skewed a certain degree out of tolerance.   They will set a desired threshold for their positions and if a position exceeds or drops below the thresholds, they will rebalance the portfolio to get everything back in line.  For example, if a position moves +/- 3% away from the target percentage, it triggers a rebalance.  

For simplicity, I ran the numbers for this portfolio with an annual rebalance.  Different strategies may produce different results during the timeframe I looked at.  Again, trading costs and timing of sales/purchases would impact the actual results in real-life, but in make-believe-land for today, we are going to ignore those variables, since they will differ for everyone.

Anyways, I found if you rebalanced the portfolio annually, you end up with $1,422,577, which is $24,212, or about 6% more than if you didn’t rebalance.  6% also doesn’t seem like a lot, but over a 40-year span, that could result in 26% more money (or upwards of $1M for some of you).  6% in ten years is a lot better than what Vanguard’s study suggests, but this is a short timespan and a limited scope.  Things might gravitate towards the mean in future years or other scenarios.  

Final Thoughts

Hindsight is 20/20 and it is a lot easier to reflect on things in the past than it is to predict what will happen in the future.  It’s darn near impossible to predict the future, do don’t bother trying.  

This exercise is a good example of two things:

  1. Don’t get caught up in the news headlines.  You read stories about how stock investors lost money over the course of the decade, which rarely happens.  In reality, if you were properly diversified, you may have actually made money during that time span.
  2. Diversify!  I can’t stress it enough!  By being properly diversified, you will never have the best performing portfolio.  That’s right.  There will always be a portfolio that performs better than yours.  By definition, being diversified means that some of your investments perform worse than others.  That is a good thing. Why is that a good thing?  Because it also means that you will never have all of your money invested in the worst performing investment!  Avoiding catastrophe is just as important as capitalizing on opportunity.  

If you were invested across multiple asset classes (stocks, bonds, US, international, etc.) in the early 2000’s, there is a decent chance you would have come out ahead during one of the worst decades for US stock investors in our history.  

In the current decade, US stocks have fared well compared to their international counterparts and other investments such as bonds or commodities.  But that trend isn’t guaranteed to continue.  As difficult as it may be to keep investing year after year in areas that “aren’t performing as well” as your large-cap US stock fund, stay disciplined and remain diversified.  There will likely be a time again when large US stocks don’t perform the best.  During that time, you will be glad you are diversified.  

how to invest


Investments involve risk of loss, including total loss of principal.  Examples are hypothetical and for illustrative purposes only.  You cannot invest directly in an index.  If fees and expenses were factored in, results could be less.  This should not be construed as specific investment advice.  Always consult with your investment advisor before making any investment decisions.

Indices used as follows:

S&P 500: S&P 500

Small Cap Equity: Russell 2000

Developed International: MSCI World ex USA

Emerging Markets: MSCI Emerging Markets

US Bonds: Barclays US Aggregate Bond Index 

High Yield Bonds: Barclays High Yield Bond Index

International Bonds: Barclays Global Aggregate ex US Bond Index

Real Estate: FTSE EPRA/NAREIT Developed REIT Index

Cash: 3-Month Treasury Bill