The Lost Decade

Patience and discipline are essential characteristics of the successful investor, but there is a limit to one’s patience. The S&P 500 fell 12% in the second quarter of 2010 and, with the 2008 market collapse still fresh in our minds, investor fear is running high. A good approach to help weather short-term market volatility is to take a long-term perspective, but with the bull market of the 1990s a distant memory, one begins to wonder just how long we have to wait. The S&P 500 has had an average annual return of -0.9% since 2000, one of the worst ten-year periods since 1927, leading the Wall Street Journal to call it “the lost decade” for equity investors. Is it time to throw in the towel on stocks and turn to bonds, real estate, hedge funds or gold? Before making any hasty decisions, please consider the following.

As indicated by the S&P 500, the past ten years have indeed been a lost decade for investors in large cap U.S. stocks. However, we advocate broader diversification across the entire spectrum of publicly traded domestic and international stocks, including emerging markets. We also emphasize small cap and value stocks, which have historically outperformed the overall market averages over long time periods. Finally, real estate securities and bonds are held as diversifying asset classes in many of our client portfolios. We primarily use DFA funds to construct our investment portfolios, so let’s take a look at the returns of some representative DFA funds over the past 10 years:

Average annual total returns from July 1, 2000 to June 30, 2010:
DFA U.S. Large Cap Value Portfolio (DFLVX): 4.8%
DFA U.S. Small Cap Value Portfolio (DFSVX): 8.3%
DFA International Value Fund (DFIVX): 5.1%
DFA International Small Cap Value Portfolio (DISVX): 9.8%
DFA Emerging Markets Value Portfolio (DFEVX): 15.2%
DFA Real Estate Securities Portfolio (DFREX): 9.7%
DFA 5-Year Global Fixed Income Portfolio (DFGBX): 4.9%

With these returns, it was far from a lost decade for investors in these funds, even when considering inflation, which has averaged about 2.5% per year since 2000. None of this is meant to sugarcoat the returns of the past quarter, which were indeed dismal, and there is no guarantee that things won’t get worse before they get better. It is simply a reminder to take a long-term view and take some comfort from history, keeping in mind that U.S. stocks have returned an average of 10.2% per year since 1927. If there is any upside to a declining stock market, it is that stocks get cheaper. The average price/earnings ratio for stocks in the S&P 500 is now 13.5 compared to a historical average of 16. It is hard to be a contrarian investor at times like this, but if history is any guide, we may look back at this period as having been a good time to accumulate stocks.

Please feel free to contact me at any time if you have any questions or comments.

Jeffrey J. Brown, MD CFA
July 2010

Back to learning Center

Recommended Reading for Investors