The first decade of the 2000s was a difficult one for investors.
As the new millennium dawned, the ebullience of the dot.com boom turned into a sharp market sell-off, highlighted by the collapse of many previously high-flying tech stocks. By the middle of the decade, markets recovered, but a credit crisis soon ensued, followed by the Great Recession. Newspapers referred to this as the “Lost Decade.” The S&P 500 recorded its worst ever 10-year performance in that decade, which was even worse than its performance during the 1930s depression.1
In retrospect, market declines shouldn’t have been a surprise. After all, if you had visited a fortune teller in 2000 and they told you the following decade would contain:
- Two Wars
- Two Recessions
- A Housing Crisis
- A Credit Collapse
You might have guessed that the stock market would be weak. Perhaps you would have avoided the market completely.
At first glance, avoiding the market appears like it would have been a great idea. After all, as the graph above demonstrates, investors in Treasury Bills beat the S&P 500 during the 2000s, and with a heck of a lot less volatility.
Now, let’s look at the markets more closely.
The post-crisis years have been good to investors allocated into large-cap U.S. stocks. This makes it easy to forget why diversification makes sense, but what about the Lost Decade? Back then, while the S&P 500 was limping along to a (-9.10%) total return, other asset classes produced the following total returns:
- S. Small Cap Value Stocks +231.3%
- S. REITs +175.6%
- S. Government Bonds +82.0%
- Emerging Markets Stocks +202.3%
- Emerging Markets Value Stocks +413.8%
So, on closer examination, maybe that decade wasn’t so lost after all.
Between January of 2000 and December of 2009, investors in the S&P 500 lost money. In fact, a $1,000,000 portfolio invested at the beginning of that period would have declined to $909,047 by the end of the decade. On the other hand, a globally diversified portfolio of stocks and bonds would have grown from $1,000,000 to $1,866,681.
Consider those two portfolios.
One is owned by an investor still on track to meet their retirement goals.
The other belongs to someone that may have to seriously reevaluate their retirement timeframe and lifestyle.
Which portfolio would you rather have?
The past is never a perfect prologue to the future, and the bottom line is that no one can predict the future with absolute certainty. The best we can do is hypothesize probabilities, and then arrange portfolios to perform well across the widest range of outcomes.
So, to me, the important question is this:
If you’re now seventeen years closer to retirement than you were in 2000, can your retirement plan really survive another lost decade?
Can your retirement plan really survive the increased risk that comes from focusing on a narrow subset of the global capital markets?
If not, maybe it’s time to consider the benefits of broad diversification.