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The “Lost Decade” – When Will It End?
By George Gay

When I joined First Affirmative Financial Network on November 1, 1986, the Standard & Poors’ 500 Index (S&P 500)[i] stood at 243.98.  When First Affirmative converted to a fee only, SEC Registered Investment Advisory firm on July 1, 1999, the S&P 500 stood at 1,372.71, an annualized gain of 15.96%[ii].

As of the date I am writing (December 9, 2011) the S&P stands at 1255.19.  Since July 1, 1999, we have experienced Y2K, 9-11, the Bear Market of 2001-2002 (one of the three worst in the past 100 years), the Financial Crisis of 2008-2009 (also one of the three worst Bear Markets in a century), and we are now living through the potential meltdown of the European Union.

In twelve and a half years, stock prices, like a roller coaster, have finished where they began; but the ride has been terrifying for many people.  This performance (or lack thereof) is being referred to as the “Lost Decade,” an especially chilling appellation for Baby Boomers nearing retirement age.

Possible Good News #1:

The Dividend Yield on the S&P 500 is higher than the Ten-Year U.S. Treasury Bond.

Stocks of large U.S. companies are extremely inexpensive relative to government bonds.  I would, personally, much rather own a portfolio of equity income focused blue chip stocks that are paying dividends of around 3.5%—and that also have the likelihood of both increasing dividends over time AND increasing in value—than owning 10 year Treasurys that will pay me 2% for ten years and then merely give me my money back.

Possible Good News #2:

Stocks are much more reasonably priced compared to earnings.  At the beginning of what is now being called the “Lost Decade,” stocks were more highly priced relative to 10-Year Trailing Earnings than ever before.  Investors paid a very high historical price, and failed to receive any reward.  (A possible corollary to gold today?)

 With stock prices versus trailing earnings at a much more reasonable ratio today, it is quite possible that the performance of equity markets over the next ten years will be much closer to “normal.”

Possible Good News #3 and #4

#3:  For each of the rolling 60-year periods ending from 1986 to 2010, the compound average growth rate of the stock market (as reflected in the S&P 500) has been over 9%.  This analysis includes the last eleven periods that include the “Lost Decade!”


#4:  Periodic investments into the markets[iii], such as in 401(k) retirement accounts, can still succeed.  This chart shows the history of an actual client who invested in 1996, and who has made monthly contributions to her IRA ever since.  Despite the “Lost Decade” her account is worth 51% more than the value of her contributions over time. 

Obviously, no one can accurately predict what will happen in the weeks or months to come.  But looking at longer-term trends and ratios can give an idea of what “normal” behavior is for markets and what is not.

[i] The S&P 500 Index is a market-cap weighted (meaning large companies count more than smaller ones) representation of  500 of the largest publicly traded companies in the United States.  As with any index, there is no way to invest in the index specifically.  Indexes do not show the effects of cash drag, trading costs, fees or other expenses, and are used for comparison purposes only.

[ii] Past performance is not a guarantee of future results.

[iii] Dollar Cost Averaging is a method of investing which can reduce the impact of short-term price fluctuations on your investment portfolio. It involves the investment of a fixed dollar sum at regular intervals over time, the result of which is an average price, based on the number of shares or units obtained at each of the prices prevailing on the dates of purchase.  Dollar Cost Averaging will not guarantee a positive return in a declining market.

Posted: December 14, 2011