Last Updated Apr 4, 2009 5:29 PM EDT
The S&P 500 measures the performance of 500 of the largest U.S. companies. The S&P 500, however, does not constitute the entire stock market. In addition to large companies, there are also mid-cap and small-cap companies in the stock market.
Surprisingly, over the last 10 years, both the mid- and small-cap sectors of the stock market were positive by about 40 percent. Therefore, if you had money in mid and small caps, the gains in those sectors would have helped offset some of the declines in the large companies represented by the S&P 500.
Moreover, while media reports are focusing on the terrible stock market returns, they have forgotten to report about the bond market. Over the last 10 years, the bond market is up by about five percent per year, for a total return of about 60 percent.
This means if you had a balanced account at 60 percent stocks and 40 percent bonds, the hypothetical portfolio would have increased by about 15 percent to 20 percent over those 10 years. Not great for 10 years, but it is positive during one of the worst market cycles in history. Now past performance is no guarantee of future returns, but this simple example helps illustrate why balance and diversification are promoted as a prudent way to manage your retirement assets.
So stay fully diversified with your stocks, and don't forget to balance your retirement funds with a healthy dose of bonds.