The Lost Decade - The decade has been awarded a cute name, but it's not very accurate
As of December 31, 2009, the Dow Jones Industrial Average, the S&P 500 Stock Index, the NASDAQ and the EAFE were all lower than they were on December 31, 1999 — a lot lower. The NASDAQ itself is 44% lower than it was 10 years ago — you know, when you were worried about Y2K.
Still, I’m willing to bet that for many of you, your investment, brokerage and retirement accounts are all worth more today than they were 10 years ago.
There are two reasons why this is likely so. First you continued to save money throughout the past decade. You kept contributing money to your retirement plan at work and maybe also funded IRAs and other investment accounts.
By buying more shares, especially as prices declined from 2000 to 2002 and in 2008, you exploited a concept known as dollar cost averaging, a strategy that enables you to improve long-term returns by continually buying shares during temporary market declines. Thus, it’s likely the value of your accounts was higher by the end of the decade, despite the fact that the stock market itself remains much lower.
Second, you likely didn’t place all of your money solely in the U.S. stock market. Most people would consider such a move to be far too aggressive and risky. Instead, you probably own a more diversified portfolio that contained foreign stocks, bonds, CDs, real estate and natural resources such as oil and gold, in addition to U.S. stocks.
Such diversification proved its worth, as gains in some asset classes were able to offset losses in others.
Surely some might have exited the last decade with a lower net worth than when they started. They are likely lamenting the fact that they’ve “lost” 10 years of wealth creation opportunity.
But the bulk of our clients, by contrast, have more money today than they did 10 years ago, thanks to the smart dual strategies of continuing to invest and diversifying.
Who says you need a rising stock market to make money?
Disclosure: Dollar Cost Averaging does not assure a profit or protect against a loss in a declining market. For the strategy to be effective, you must continue to purchase shares in both up and down markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low price levels.