Don’t believe the myth of the stock market’s “lost decade”

We have been hearing the hype for over a year: the 10-year period from 2000 through 2009 was a “lost decade” for stock market investors, featuring two large bear markets and a cumulative loss on the Standard & Poor’s 500 Index of 9 percent. It is true that some investors did not have a good experience over the last 10 years. Those who put all of their money into large capitalization U.S. stocks probably lost money or made very little. And those who invested in the darling growth stocks of 1999 like Enron and Yahoo and AIG may have lost virtually everything they had.

But investors who heeded the lessons of diversification would have found it hard not to make money over the last 10 years, because most of the major asset classes enjoyed positive results.U.S. small stocks, as measured by the Russell 2000 Index, gained 41 percent over 10 years. Their overseas counterparts, as measured by the MSCI EAFE Small Cap Index, gained 52 percent. Meanwhile emerging markets stocks gained anywhere from 154 percent to 213 percent, depending on which index you look at. Despite the problems with real estate in the last recession, an index of U.S. real estate investment trusts gained 176 percent over the decade.

Conservative investors who decided to hold some bonds in their portfolios in order to smooth out their returns also profited. Five-year U.S. Treasury notes gained 82 percent over 10 years, and even super-safe one-month Treasury Bills gained 31 percent. The inclusion of bonds in a portfolio over the last decade also had the advantage of keeping the portfolio from plunging as far as the stock market during the two bear periods, which saw all classes of stocks fall in lockstep for short periods of time.