Visualizing a Lost Decade

November 9, 2010 by  
Filed under Investing

Would you like to see an ugly picture of long term investing in the last decade? Read on.

The chart below plots the nominal and real (after inflation) returns of the S&P 500, assuming that you invested $1000 at the market peak in March 2000.

It’s not a pretty sight, is it? Investors still aren’t at the real return break-even point. It’s even worse when you consider that these plotted returns include dividends but exclude the effects of taxes and fees.

Granted, the chart is based on peak valuations but isn’t that what many folks tend to do – jump on the bandwagon when the market is hot?

Now you know why I’m not counting on the equity markets to fund my basic retirement needs. I have a different plan to provide that retirement income.

Here is a link to the source of the chart: What is “Break-Even” in the S&P 500?.

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6 Responses to “Visualizing a Lost Decade”
  1. Rob Bennett says:

    I think it’s important that people let in the full extent of the losses they have suffered. That’s the only way to learn just how dangerous stocks are at times of insane overpricing.

    The numbers do not tell the full story, in my view. A Lost Decade is a far more serious thing that it seems on first impression. Many of us do not pay off college bills and settle down and start saving seriously until we are in our mid-30s. That means that we only have three decades in which to finance our retirements. To lose one of them is to lose one-third of the game.

    And many have the thought in the back of their minds that maybe the Lost Decade means that stocks are now priced to provide good returns. Not so. Stocks are still priced high. The out-of-control bull pushed prices so high that even 10 years of zero returns have not been enough for us to get back to reasonable prices. It was a Lost Decade with no compensating side to it.

    The real Lost Decade was the late 1990s. That’s when we borrowed from future investors (today’s investors! us!) what we needed to borrow to pay for the Get Rich Quick stuff that seemed so appealing for a time.

    This will all turn out to have been worth it if we all learn to truly hate bull markets and never, ever, ever let one develop again. I believe that that’s where we are headed. Too much pain!


    • MasterPo says:

      Never let a bull market come back? Doesn’t sound like an economic system I’d want to invest in.

      Markets get bullish (presuming a rational market model) when there’s good news. As an investor I sure as heck want a bull market when the news is good!

  2. MasterPo says:

    ps- Wait until inflation *really* kicks in starting next year!

    If you lived through the 70’s it will make you long for the good ‘ol days. :-(

  3. Evan says:

    Not that I don’t agree with your general distaste for the system – the “lost” decade wasn’t entirely a loss if you count dividend reinvestment. Certinatly not a hot decade (or even a good one) but it wasn’t 0 or –

    • MasterPo says:

      Agreed. After the 2001/2002 post-9/11 drop and up until October 2008 my portfolio did pretty decently. Always like to do better but I had few complaints. Certainly a heck of a lot better then the last 2 years.

  4. Adam says:

    If you were properly diversified and rebalanced regularly (even yearly) throughout the entire decade, then the massive gains of your stocks would have been transferred into more stable assets, and the crash would not have affected you as greatly, although you still would have suffered some losses, it wouldn’t be a real “lost decade.”

    It’s more true that the uninformed/emotionally driven/overly risky investors were penalized by the crash by losing greater amounts.

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