Re: (OT) 2000s: Worst-ever decade for stocks in real purchasing power [surpassing the 1930s, 1970s]
Matthew Kruk
stated that stocks have dropped to late 90's levels (might have been
longer that that when I heard it ... regardless ...). The late 90's
were the "good times". It's all relative ...
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January 2, 2010
Your MoneyFor Savers, It Was Hardly a Lost Decade By RON LIEBER
It was the age of zeroes, the epoch of naughts, an era when we started
with something and added just about nothing.
At least that's what stock market commentators have been gravely telling
us for at least a year. The 2000s, they argue, was a lost decade. And at
first glance, they appear to have gotten it exactly right.
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.
For those people, it was not a lost decade at all. Even those who
started with a low six-figure balance could have doubled their total
savings in the last 10 years.
How? Consider a few decade-long scenarios that I asked Vanguard to run
using its low-cost index mutual funds. In each, we assumed that the
money was in a tax-deferred account and that the account owner
reinvested any dividends.
First of all, even people who put all of their money in stocks rarely
invest only in the big American names that make up the S.& P. 500.
So say you put $50,000 in the much broader Vanguard Total Stock Market
Index Fund at the beginning of the decade. Then, for exposure to
equities outside the United States, you put another $50,000 into
Vanguard's Total International Stock Index Fund.
As of mid-December, your $100,000 would have grown to $109,334, though
that is just $84,921 when you take inflation into account. Still pretty
dismal, though it shows the importance of diversification even within a
broad category like stocks.
Now, consider a much more realistic scenario, with 50 percent of the
money in bonds. If the decade begins with $25,000 in each of the
domestic and international stock funds and $50,000 in Vanguard's Total
Bond Market Index Fund, you end it with $145,619, or $112,971 in 2000
dollars.
That's how retirees, with a fairly aggressive 50 percent chunk of the
portfolio in stocks, might have fared if they had been hoarding some
investments while living mostly off Social Security and a pension or
annuity. (For those who were spending down a portfolio with this
aggressive allocation, there is no salve except the hope that what they
have left will continue to bounce back.)
But if you're not yet retired, you were probably adding money to your
portfolio throughout the decade. Let's say you started with the same
$100,000 and the identical 25/25/50 asset allocation from the previous
scenario. Now, imagine that you added $1,000 a month and then rebalanced
your account annually so that you began each new year with that original
allocation.
The result? You ended up with $313,747, or $260,102 in January 2000
dollars. Hardly a lost decade at all.
Your own balance may be much different from this. But if you're
moderately affluent, reasonably diligent and began the decade in your
30s or 40s (or were a bit older and got a late start in getting serious
about retirement savings), this scenario won't be that far off.
It's easier to hit that $1,000 monthly saving if you have an employer
matching some of your contributions. And consistent saving depends in
large part on avoiding unemployment, which hasn't been easy.
Even if your income continues uninterrupted, you can't lose your nerve
either. Plenty of people take their money out of stocks and put it into
cash when the stock market falls. Then, they don't put it back in until
long after the recovery begins.
This can cost you whole percentage points in annual returns, which add
up to hundreds of thousands of dollars over a lifetime. Indeed,
investors in the hot fund of the moment will often earn returns way
lower than the fund's ads proclaim, though Vanguard index fund investors
tend to be more of the slow and steady type.
And it's that lifetime that's important. The recent focus on the past
decade's performance is misguided for all sorts of reasons.
First of all, 10 years is not a particularly long time horizon.
Retirement investors may begin saving at 22 and have money in stocks at
82. People who open 529 college savings accounts upon the birth of a
child will keep them open for at least two decades and possibly longer.
A decade is a particularly short period of time for anyone who will need
the money at the end of it. If that's the case, the majority of it
probably shouldn't be in stocks in the first place, which would make the
10-year S.& P. 500 return less relevant.
Finally, this particular decade happened to start at an enormously
overvalued moment. According to data from the Yale economist Robert J.
Shiller, as of January 2000, the 10-year S.& P. 500 price-earnings ratio
stood at 43.77, a month removed from its record high.
As a result, a lot of the lost decade hand-wringing is merely a result
of this coincidence of the calendar. The 10-year performance figures may
not look like such a lost decade a year or two from now, when the tally
begins in 2001 or 2002 and the S.& P. 500 was at much lower levels.
The real danger in the lost-decade rhetoric is that it could scare
people away from stocks permanently. Again, the long term is what
matters to most stock investors. And according to Vanguard, the S.& P.
500's worst 45-year run, for the period ending in September 1974,
produced an average annual return of 6.53 percent.
Many of us could live with that, but stocks may not do even that well
for the next 45 years. Near the stock market's nadir in 2009, Robert D.
Arnott of Research Affiliates scared a number of readers half to death
by noting in an article in The Journal of Indexes that from February
1969 to February 2009, investors in 20-year Treasury bonds outperformed
the S.& P. 500.
Stocks have since pulled ahead again, but Mr. Arnott's larger point
still stands - that the reward you're supposed to get for the added risk
of investing in stocks can seem awfully elusive in some contexts.
No one knows which asset class will outperform the others over the next
10 (or 45) years. That's why it's important to invest in more than just
stocks, and why a bad stretch for certain stocks may not matter as much
as it first appears.
Few of us have the long-term investing prowess to pick the right moment
for the right stocks. But persistence has its own rewards. Savers are
never losers, even if some stocks have let us all down in the short
term.
Copyright 2010 The New York Times Company