There is something important that is being discussed in the financial press at this time. The year 2010 began about a week ago, which brings to a close the first decade of the 21st century. So people are tallying up the results for this past decade. And the results aren’t looking all that great.
The Lost Decade
Many observers are calling the 2000s the “Lost Decade” for stock investors. Here is what they mean. The chart below shows the growth of $10,000 over the ten-year period from the end of 1999 to the end of 2009. Investors use “Growth-of-$10,000″ charts to see how much 10,000 dollars placed into a mutual fund would would be worth at the end of some period, like ten years. In this chart the orange line shows how much bonds returned and the blue line shows how much stocks returned.
VTSMX = Vanguard Total Stock Market Fund
VBMFX = Vanguard Total Bond Market Fund
VBINX = Vanguard Balanced Index Fund
As can be easily seen, $10,000 put into stocks in 2000 ended up in 2010 about where they started. In other words, the total return, including dividends and price appreciation, was zero over ten years. Meanwhile, bonds showed a steady climb up from $10,000 to around $18,000. Stocks were ahead for about one year, but then fell way behind and lagged bonds for the rest of the decade.
This result is definitely not what people were expecting back in 2000. Probably 19 out of 20 investing experts said stocks would beat bonds over ten years. Even conservative advisers led their customers to believe that stocks would return 10% per year over the decade. That would have turned $10,000 into $25,000. But they were all wrong. Stocks came out about even. When you account for inflation, stocks lost ground. (There were a handful of forecasters who got it right. But back in 1999 they were dismissed as kooks or crackpots.)
Silver Lining
Which line would you rather be on, the orange line or the blue line? A good bit of news is that few investors put everything into either stocks or bonds. Prudent investors diversified their holdings, meaning they used a mix of both bonds and stocks. On the chart above, the purple line shows the return of a balanced fund which held a mixture of 60% stock and 40% bonds. At the end of ten years, the investor ended up with about $13,000 That is less than many had expected, but that’s the way the chips fell.
Lessons Learned
Here are some takeaways about investing:
- With stocks you don’t always get what you are expecting. That’s the risk of owning stocks.
- Even though some people appear to know what’s going on, even experts don’t really have a clue. Some people say “Nobody knows nothing.” Sometimes the crackpots are right.
- Bonds provide a much steadier return with fewer ups and downs. A smoother ride.
- By contrast, stocks go up and down dramatically. Your balance can be cut in half in a short period of time like in 2008. A roller coaster ride.
- Diversify your holdings by owning some of both stocks and bonds. If you like a smoother ride, have more bonds. If you like the excitement of a roller-coaster, have more stocks.
It turns out that, as an investor, the most important investing decision you make is how to split your money between stocks and bonds. That important question will be discussed in another article.
Read about the The Lost Decade of Stock Investing in the Wall Street Journal online.
Then, over on Econbrowser, read some economic analysis about what caused this Lost decade for stocks by James Hamilton, Professor of Economics at the University of California, San Diego
charts are from Fidelity.com/Research>Mutual Funds
The views expressed in this article are those of the author and do not necessarily represent the views of Laguna Beach Bikini, its editors, staff or any other organization.
