A Tale of Two Decades: Lessons for Long-Term Investors

January 2020

The first decade of the 21st century, and the second one that recently ended, have reinforced for investors some timeless market lessons: Returns can vary sharply from one period to another. Holding a broadly diversified portfolio can help smooth out the swings. And focusing on known drivers of higher expected returns can increase the potential for long-term success. Having a sound strategy built on those principles—and sticking to it through good times and bad—can be a rewarding investment approach.

“THE LOST DECADE”?

Looking at a broad measure of the US stock market, such as the S&P 500, over the past 20 years, you could be forgiven for thinking of Charles Dickens: It was the best of times and the worst of times (see Exhibit 1). For US large cap stocks, the worst came first. The “lost decade” from January 2000 through December 2009 resulted in disappointing returns for many who were invested in the securities in the S&P 500. An index that had averaged more than 10% annualized returns before 2000 instead delivered less-than-average returns from the start of the decade to the end. Annualized returns for the S&P 500 during that market period were −0.95%.

Yet it was a good decade for investors who diversified their holdings globally beyond US large cap stocks and included other parts of the market with higher expected returns—companies with small market capitalizations or low relative price (value stocks). As Exhibit 2 shows, a range of indices across many other parts of the global market outperformed the S&P 500 during that time span.

FLIPPING THE SCRIPT

The next decade revealed quite a different story. It has looked more like best of times for the S&P 500, as the index, when viewed by total return, more than tripled in the bounce-back from the global financial crisis. US large cap growth stocks were some of the brightest stars during that span. Accordingly, from 2010 through the end of 2019, many parts of the market that performed well during the previous decade weren’t able to outperform the S&P 500, as Exhibit 3 displays. Since many of these asset classes didn’t keep pace with the S&P, these returns might cause some to question their allocation to the asset classes that drove positive returns during the 2000s.

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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

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