Were the 2000’s Really a ‘Lost Decade’?

It’s been well-reported in the media that the 2000’s were a “lost decade”, meaning that the US stock market is trading where it was 10 years ago.  Tony warned you back in April that the media would have a heyday with this news.

The media calls this a “lost decade” because an investor who bought and held an index fund at the beginning of the decade has not made money.

Why does the media assume we invest like this?  Most people don’t.  In fact, I have yet to meet anyone who invested a lump sum of money in an S&P 500 index fund on 12/31/99, let it sit, never added to it, and never withdrew from it.

The “New Normal” was the most overused phrase of 2009. The “Lost Decade” is quickly becoming the most overused phrase of 2010!

I don’t know about you, but I know for sure that the 2000s were NOT a lost decade for me.

There is no excuse for an astute investor to have a lost decade. Consider these four points:

#1 – Good stockpickers should have made money over the last 10 years. Although the S&P 500 index was down for the decade, many individual stocks were up!

There are 80 stocks currently in the Russell 3,000 that were up 1,000% or more last decade.

The 50 best performers in the Russell 3,000 were all up more than 1,200% for the decade.

The top performing stock for the decade was Medifast (MED) with a gain of 16,209%.

#2 – Most people don’t invest 100% of a lump sum of money into an S&P 500 index fund and let it sit for a decade. Ron Lieber wrote an excellent article for The New York Times making this point:

If you invested $100,000 on Jan. 1, 2000, in the Vanguard index fund that tracks the Standard & Poor’s 500, you would have ended up with $89,072 by mid-December of 2009. Adjust that for inflation by putting it in January 2000 dollars and you’re left with $69,114.

But that is not how most real people invest. They don’t pour everything they have into just one type of asset and then add nothing to it for 10 years. Instead, they buy stocks of all sorts, and bonds and perhaps other things, too. And many millions of them dutifully add more money regularly, usually into a retirement account that they won’t touch for longer than a decade.

#3 – Savers end up dollar cost averaging their investments. Rather than investing a lump sum at the beginning of the last decade, many investors would have been regularly adding to their stock portfolio on a monthly, quarterly, or annual basis.  For these investors, buying stocks at different prices throughout the decade could have dramatically improved their returns.

#4 – Trend followers would have identified sustainable trends in the market and adapted to them. Brian Shannon wrote a book on how to do this.  I highly recommend it if you invest your own money.

So what can we learn from the last decade?  I think the biggest lesson from the last decade is that active management matters.  Good stockpicking matters.  Finding great mutual fund managers matters.  Identifying changes in the trend of the market and adjusting your portfolio to benefit from them…matters.

The only thing the “Lost Decade” promoters prove is that an active investment strategy is a much better approach than passively buying index funds and holding them forever.

So, what do you say? Were the 2000’s a lost decade for you? Or, did you come out a winner?

Sources:

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