Was the Last Decade Lost?

This is the first post of the new decade. I can’t be sure, but I think that the recent two digit change in the Great Odometer has been a little underplayed this time around, relative to the buzz from, say, 1990.

(Fussbudgets who insist that decades start with years that end in 1 instead of 0 need to stop taking themselves so seriously. Yes, the conventional definition New_Year_Aftermath Crop is not entirely logical. Does it also bother you that fire alarms go "off" when they operate?)

Part of the under-buzz may be due to the fact that we never really got around to naming the decade that just ended. In fact, a large portion of what media coverage the decade got focused on this oversight. I have no helpful suggestions. Personally, I will always think of the 2000-09 period as the Really Fast Decade. Seriously, it feels like it lasted ten months, at most.

For investors and savers, one obvious nominee is The Lost Decade. My main objection to this is that the name is already taken, referring to the 1990s in Japan, where two generations of postwar economic expansion came to a sudden and bewildering halt on or about January 1, 1990. Compared to that, our last ten years wasn’t really all that lost. The Misplaced Decade?

Nevertheless, from an investor’s point of view, the last decade was pretty discouraging. From 12/31/99 to 12/31/09 the S&P 500 lost 9.1%, dividends included. Factor in inflation (the CPI was up about 30% from 12/31/99 to 11/30/09) and you’ve got a decade that wasn’t just time wasted standing in place, it was a period of significant loss of wealth.

Ron Lieber at The New York Times recently tried to put a positive spin on the past ten years, arguing that For Savers, It Was Hardly a Lost Decade. At some level I have great sympathy for what Lieber is trying to do. Many people need an investing pep talk just now, lest they stop putting money in the stock market or, heaven forbid, stop saving. But there is a point at which efforts to sugar coat the truth cost you your credibility, causing the entire effort to backfire.

Lieber begins his stock market apologia by conceding that yes, the S&P 500 went down, and if you had all your money there you would be very unhappy now, "But that is not how most real people invest." Real people, apparently, significantly diversify their holdings away from the S&P 500 and continue to add to their kitty through saving.

For example, Lieber explains, if you had split your investments evenly between a Vanguard US stock fund and an international one, you would have been up 9.3% over ten years. I agree that is a lot better, although it still trails inflation by rather a lot and is about a tenth of what many pundits told investors to expect from the stock market.

But more to the point, who was advising "most real people" to put half their stock market investments overseas in 1999? For that matter, who is saying to do so now? An advisor who recommends putting 15% outside the US is considered enlightened and cosmopolitan. (If not eccentric and possibly reckless.)

Real people exhibit even more wisdom in that they put half their money in bonds. A mix of 50% bonds, 25% international stocks, and 25% US stocks went up about 46% in the decade just ended, beating inflation by about 1.2% a year. Lieber calls this "a much more realistic scenario" than the 100% in stocks story, but I am not so sure. Blow the dust off a personal finance book from ten years ago and you are likely to find that allocations of 50% to stocks were recommended only to the aged and timid. Most people were told to invest more heavily in equities than that, up to, and including, 100% of their savings.

Lieber’s last point is easily the silliest. Real people kept adding to their investments though additional savings. $100,000 put in the 25/25/50 mix on 12/31/99 would have grown to $145,619. That’s not bad, but if the person had added a mere $1,000 a month to the fund over the decade, it would have grown to $313,747. Zowie.

This is a rather absurd example of comparing apples to oranges. $100K didn’t grow to $314K. An additional $120K was added to it. $220K grew to $314K. And if an investment mix with less foresight had been chosen it is more than likely that the real person in the example would have been better off putting the original $100K and the $1K a month in a mattress.

The harsh and somewhat disheartening truth is that the past ten years really were pretty nasty for ordinary investors who followed ordinary advice. Part of this is the arbitrariness of the ten year window. The stock market was particularly expensive on 12/31/99, so returns since then will always look poor. (The S&P is up 13.5% since 12/31/01.)

But the primary source for disappointment in investment returns, particularly stock market returns, over the past ten years is unrealistic expectations. On average, the stock market does go up, beating both inflation and bonds. But to get that higher expected return you have to accept volatility, and that means that stocks may not beat bonds or inflation in any given year, decade, or even in your lifetime.

I do not think that "most real people" understand this, and Lieber is not helping any. But on the other hand, real people tend to invest their savings in more than just stocks and bonds. In particular, for many households the amount in financial instruments such as stocks and bonds is dwarfed by what was invested in the house they live in. That story had its own unhappy ending as the decade came to a close, but it is worth mentioning that, even with all we have been through, from January 2000 to October 2009 the Case-Shiller 20 City Composite was up 47%.

More on that tomorrow.


  • By Mark Wolfinger, January 4, 2010 @ 1:42 pm

    Words have definitions and the decade begins Jan 1, 2011 regardless of how seriously I do or do not take myself.


  • By Susan Tiner, January 4, 2010 @ 2:15 pm

    It may be absurd to say that $100K grew to $314K, but isn’t it also absurd to assume that the entire $100K was invested 12/31/99 when the stock market was particularly expensive? More likely it was gradually invested over a number of years.

  • By Jim, January 4, 2010 @ 3:38 pm

    When I read this I didn’t realize his $314k result was based on starting with $100k *PLUS* adding $1000/month. I didn’t read it closely and thought hte $314k was just hte $1000/month over 10 years ($120k sum) investment. That isn’t very realistic to add the $120k on top of the $100k and compare it to just the $100k. Of course if you invest EXTRA money every month you’ll come out ahead.

    I think looking at the $1000 / month investment scenario is the most realistic point about his article. Looking at returns on a lump sum held from 1999 to 2009 isn’t typical. But looking at growth of $1000/month over that period is a lot closer to reality for most of us.

    I think his 25% US stock / 25 foreign / 50 bonds allocation is probably a little more realistic than the 100% S&P allocation. Neither are really realistic but most people have some diversification.

    He probably should have stopped at the point that if you’d had any diversification at all outside the S&P500 (which most people do) then you’d be ahead for the decade even though its been a horrible decade starting at a peak and ending in a recession.

  • By Jim, January 4, 2010 @ 3:39 pm

    “When I read this I didn’t realize…” I meant to say that when I originally read the NY Times article in question the other day.

  • By Craig, January 4, 2010 @ 5:48 pm

    Mark, nothing is more tiresome than a pedant who can’t be bothered to get his facts straight.

    The ordinally numbered _centuries_ do indeed run from a year ending in the digits 01 to the next one ending in 00, and, oh, how much fun we pedants had pointing this out ten years ago.

    We have two fashions of defining centuries–periods of one hundred years–in English, but only one common definition of decades. It is important to understand this stuff if you’re going to go around correcting people. One method for centuries is discussed above. The second–and somewhat less formal–method we have of identifying centuries is by referring to the hundreds and (if applicable) thousands digits of a block of contiguous years: the five hundreds, the nineteen hundreds, and so on.

    Now it is a somewhat tricky fact that these two systems do not precisely coincide. The year 1900 was part of the “nineteen hundreds” (by definition), but not part of the twentieth century.

    Now, for full marks: how do we refer to decades in English? Have you heard anyone–anyone at all–talk about the year 2010 being the first year of the “two hundred and second decade?” If so, congratulations! You have met perhaps the one human being on Earth you are able to criticize for getting the math wrong. All of the rest of us organize decades by referring to the penultimate digit of a block of ten years, and that is why we call them things like “the sixties,” “the eighties,” or “the aughts.”

    A clever person knows that 1800 is not the start of the nineteenth century; only a very learned fool would suggest that 1960 was not part of “the sixties.”

    Please focus your ire, if you must, on people who refer to this decade as “the teens” rather than “the tens.”

  • By George, January 4, 2010 @ 5:57 pm

    I don’t think it is disheartening at all. I think it is a wakeup call. For all the millions of people who lost tons of money in the market last year. For all the people who didn’t improve their finances over the last 10 years. For all the people who are hoping that this decade will be better.

    It’s a wakeup call. If we want to do better financially we have to start doing things differently. Listening to those experts and financial advisors is a recipe for disaster. Hoping that our financial situation improves by itself is silly.

    It is time to take control of our finances and find ways to make money without hoping that the market goes up. It is time to find ways to thrive financially. The information is available. The question is, will we find it and use it?

  • By Craig, January 4, 2010 @ 6:05 pm

    Oh, and now that I have that off my chest–Happy New Year, everyone! And Happy New Decade!

  • By jammer(six), January 4, 2010 @ 6:13 pm

    Maybe we should call it The Unnamed Decade.

  • By Rob Bennett, January 4, 2010 @ 7:31 pm

    The harsh and somewhat disheartening truth is that the past ten years really were pretty nasty for ordinary investors who followed ordinary advice.

    The good news is that people are waking up to the reality that Buy-and-Hold was discredited by the academic research 30 years ago and that there has never been a time in history when the Buy-and-Hold concept did not bring financial ruin to just about all investors who bought into it as well as to the entire economy that permitted promotion of it.

    Valuations affect long-term returns. Any claims to the contrary should be dismissed as the marketing slogans that they truly (and obviously — to those not emotionally invested in Buy-and-Hold) are.

    The tragedy is that Buy-and-Hold happened to catch on at a time when stocks were priced to provide two decades of great returns. Millions attributed the great returns that followed not to the underpricing (the true cause of the great returns) but to Buy-and-Hold. The last decade was not lost if it helped us begin to consider more realistic ways to invest in stocks. I believe that there will come a day when we will look back at the 2000s as the decade at which we began the work that will eventually lead to The Golden Age of Middle-Class Investing.

    My guess is that it is going to take one more huge crash for us to turn the corner. And then I’ve got a feeling that we will all be moving on to something good!


  • By Mike, January 4, 2010 @ 11:24 pm

    Rob, what do you suggest as the preferred alternative to buy-and-hold?

  • By Rob Bennett, January 5, 2010 @ 8:12 am

    Rob, what do you suggest as the preferred alternative to buy-and-hold?

    I favor Valuation-Informed Indexing, Mike.

    The idea is to change your stock allocation in response to big changes in valuations. That way your risk profile is staying roughly constant (you are “Staying the Course” in a meaningful way). You might be at 60 percent stocks when prices are moderate, 30 percent stocks when stocks are insanely overpriced and 90 percent stocks when stocks are insanely underpriced. The historical data shows that making this one change in your allocation strategy permits you to retire five years sooner than you could following a Buy-and-Hold approach.

    If you put the term “Valuation-Informed Indexing” into a Google search box, you’ll get links to enough material to permit you to explore the idea in some depth.


  • By Mark Wolfinger, January 5, 2010 @ 6:24 pm

    I have no ire.
    I will cease and desist from mentioning this again.


  • By Patrick, January 6, 2010 @ 2:04 pm

    @Mark: I challenge you to find a definition of “decade” that specifies that they start on years ending with 1.

  • By Monevator, January 9, 2010 @ 5:54 am

    I don’t know, I agree with you, Leiber *and* the comments.

    From a strictly analytical point of view, the past rolling ten years was terrible.

    But is that meaningful in practice? Let’s feel sorry for anyone who won the lottery or sold their dotcom fantasy business and piled the cash into the NASDAQ in December 1999.

    For the rest of us, there were many periods within the decade where regular savings would have left you up-to-date – including two periods where shares were genuinely cheap.

    Anyone who stuck to regular investing has probably done fine – especially if they’ve 20 years or so to go until retirement. And anyone who isn’t should have had a fair chunk in bonds ten years ago, and they’ve soared.

    @Rob – That’s the most succinct description of your alternative strategy I’ve yet read, and I wouldn’t disagree with it in principle, even if I didn’t follow it. You realize of course Ben Graham was touting the same approach (with 25% / 75% bands) back in the 1950s?

  • By payday loans ontario, May 4, 2010 @ 6:40 pm

    The last trading day of the year saw the Dow close at 10,428.05, down by 9.3% (despite a major recovery from its March low, which is not necessarily backed by the economic fundamentals) as compared to its closing value of the previous decade i.e 11,497.12. This was the first time ever since the great depression that the Dow actually posted a loss during a decade.

  • By Professor Lembach, March 11, 2011 @ 5:10 am

    Craig – “Mark, nothing is more tiresome than a pedant who can’t be bothered to get his facts straight.” Except maybe one who doesn’t bother to argue any facts at all.

    What you call “facts” about the way we refer to time delineations are not facts at all, but, like pronunciation, merely common usage. And in the common usage of decade is “a period of ten years”. A century is “ANY period of 100 years”. The “nineteenth” or “fifteenth” or “twelfth” century or the “sixties” or “eighties” are convenient reference points and fairly elastic, especially considering that the “starting” point, while widely agree upon (in the West, at least), is completely arbitrary and hardly definitive.

    The whole calendar has been rearranged repeatedly; January 1st wasn’t the legal start of the New Year in France until 1564. SO when did the 1560′s start? How about the 1500′s? If you’re concerned only with “English”, the British Empire didn’t formally adopted January 1st until 1752. Maybe the pedants need to get together and define “us” and “we” first.

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