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 |
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."