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What the Lost Decade of Investing Means in Real Terms

The financial media has been filled with articles labeling the prior 10 calendar years as the "lost decade" for investors. From 1999 through 2008, the S&P 500 Index returned -1.4 percent per year. This was first time since the Great Depression the index provided a negative return over a 10-year period. Looking at real (as opposed to nominal) returns provides a different picture. And real returns are the only kind that matter because they're the only kind you can spend.

The following table shows this was actually the third time since the Great Depression the S&P 500 provided a negative real return over a 10-year or longer period. There are five periods when you include the Great Depression. (Please note that in the table, six periods are shown so you can see the most recent "lost decade," which is actually part of a longer period shown on the line above it.) The longest period of negative real returns was the 17-year period from 1966-82.

S&P 500 Index Nominal Return (%)

S&P 500 Index Real Return (%)

1929-42

-1.0

-0.9

1937-47

4.5

-0.3

1966-82

6.8

-0.3

1973-83

8.0

-0.2

1998-08

1.0

-1.4

1999-08

-1.4

-3.8

One of my favorite expressions is "the only thing about investing you don't know is the investment history you don't know." As the table demonstrates, the fact that we experienced a lost decade shouldn't have surprised anyone, as it has happened before. Only its timing should have been a surprise. Equity investors should have been well prepared for the possibility that such a decade would occur at some point. The risk of such an occurrence is the "price" we pay for higher expected returns. The higher expected (not guaranteed) return is called the equity risk premium because equities are risky.

Knowledge of financial history is important in preparing for the risks of equity investing. Thus, knowledge of financial history is one of the requirements of being a successful investor, one that's able to build a plan that incorporates the likelihood of such periods occurring. As Napoleon said: "Most battles are won or lost [in the preparation stage] long before the first shot is fired."

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