2000-2009: Worst Decade for Investments EverBut is “worst ever” really so bad?
The headlines scream it, and the numbers back them up: The first decade of the 21st century was the worst decade for stock ownership ever recorded.
The Yale International Center for Finance tallied the results of all stocks listed on the New York Stock Exchange and found that the average annual return was -0.51%.
That’s worse than the 1930s, when the Great Depression caused returns to average -0.22%.
It’s worse than the 1970s when, despite the energy crisis, rampant inflation and hostages in Iran, the market still managed to grow 6.61% annually.
The NYSE even did better during the Civil War; in the 1860s stocks gained a healthy 12.51% on average.
Stocks also fared better from 1834 to 1839, even though President Andrew Jackson was censured by the Senate amid his refusal to preserve the banking system of the day. Despite the turmoil, stocks rose 2.84% annually.
So I’m not exaggerating when I say that this past decade’s performance has been terrible.
You probably already knew that, but did you also realize that these past ten years were the exception, not the rule?
It’s true. When you look at the stock market returns of the past 18 decades, you see that 16 of them were profitable, with returns averaging 10% per year during those 156 years. Even when you include the two losing decades, the average annual return is still 8.82%.
Of course, losses sometimes occur. And as the past decade has demonstrated, sometimes those losses persist for years. That’s why investing in the stock market is not without risk, and past performance does not guarantee future results. But of the 176 years contained in Yale’s data, there are a whopping 130 years of positive returns; only 46 years had negative returns. Winning years beat losing years nearly three to one.
And that’s not all. The size of the gains is typically much larger than the size of the losses. For instance, in 15% of the years that were negative, losses exceeded 20%.
Yet in 32% of the positive years, gains exceeded 20%. So not only were there more years of gains, they were bigger too — serving as a “double whammy” to offset the occasional losses.
If the data reveal a problem, it’s the fact that we can’t determine in advance when the gains or losses will occur. Indeed, the Yale data show that the returns are so random that we can’t even begin to guess. That’s why it’s folly to even try — which explains why our investment management approach is to instead invest and stay invested for many years (even decades) and allow the markets to perform naturally.
2009 perfectly demonstrated the folly of trying to predict the future. Stocks, as measured by the S&P 500, dropped 25.1% during the first 10 weeks. Yet from March 9 through December 31, the Dow Jones Industrial Average* gained 63%, for a total return for the year of 23% — the best year since 2003.
The Dow wasn’t alone in its outstanding performance. The NYSE was up 25% for the year, while the S&P 500 Stock Index returned 27% for the year and the NASDAQ returned a stunning 45%. Foreign stocks did well, too: The European, Australian and Far East Index returned 32%.
Unfortunately, many investors, still reeling from the losses they incurred in 2008, refused to maintain their holdings of stocks and stock mutual funds. According to the Investment Company Institute, $389 billion flowed into mutual funds from April 1 through December 31 — but 84% of that money went into bond funds, not stock funds. That’s too bad, because the bond market significantly underperformed, with the Barclay’s U.S. Aggregate Bond Index gaining only 7.04% during that time.
Those who loaded up on gold, against my advice, didn’t beat the market either. The Comex Gold Index returned 23% — aside from bonds, it was the worst performer of all the major asset classes.
So as we head further into 2010, it will pay to reflect on the Yale data: Although losses sometimes occur, they are dwarfed by both the frequency and size of gains. Knowing this will help you maintain a long-term focus while reading headlines touting news of the day.
From the March 2010 Inside Personal Finance