You Wasted the Past 10 Years of Your Life

If you think the stock market is the road to a comfortable early retirement, you're wrong. You may have thought about cashing in on the long-term average annual returns of 7% (postinflation) you heard you could get from investing in stocks, but I'm here to tell you to think again.

In the past decade, the SPDR S&P 500 ETF (NYSE: SPY  ) , an exchange-traded fund (ETF) designed to track the broad U.S. stock market, returned an amazing -1.4% per year. That's right, negative, as in less than zero. Including dividends. That's a long way from 7%.

It's a small, small world
Going global didn't help much, as the iShares MSCI EAFE Index Fund (NYSE: EFA  ) , a proxy for the world's developed markets, has provided a total annual return of 3.5% since it was started nearly nine years ago.

In fact, investors had to rely on emerging markets, which provided annual returns of 8.1% from 2000 to 2010, in order to get returns in line with the generally accepted long-term average return from stock markets.

It could be worse
However, according to Jeremy Grantham, co-founder of the asset management firm GMO, even this limited outperformance is coming to an end. He and his team of analysts are expecting emerging-market stocks to return just 4.7% per year after factoring in inflation over the next seven years. U.S. large-cap stocks are expected to return a measly 0.3% after inflation, and U.S. small-cap stocks are expected to lose almost 2% per year over that period.

Now this is only one man's (and his associates') view, but when Grantham speaks, people in the financial world listen, because over the years he has proven incredibly prescient when it comes to long-term investment returns, accurately calling the annual rates of return on 11 asset classes between 2000 and 2010.

Change is in the wind
If Grantham is right, we could be in for what many commentators are calling the new normal, meaning that the broad-based market joy we experienced 1983 to 2000 will be reserved for history books. Instead, we could be in for several years of volatile markets that generally move sideways.

In this type of market, index funds and ETFs won't do your portfolios any favors. Buy and hold just won't do it. Investors will need to be much more discerning and proactive if they expect to see the types of returns that will lead to an early retirement.

Developing taste
Investors who know how to pick the stars from the wannabes will be able to take advantage of the volatility that is characteristic of this new type of market.

That means finding high-quality companies with secure dividends, companies like Johnson & Johnson (NYSE: JNJ  ) and PepsiCo (NYSE: PEP  ) , both of which have strong brands and stable cash flows to support their 3%-plus dividend yields.

Megacap blue chips like these are well-followed by both Wall Street and Main Street, so we wouldn't normally expect them to blow the doors off the market, but things aren't normal. Times of market volatility provide opportunities to snatch up these stalwarts at discount prices, and the safe dividend provides a source of income while you weather uncertain times.

Looking in the dumps
And while we may not see markets move up much over the next several years, there will be movement within markets by stocks that are currently being shunned for whatever reason.

The tragic oil spill in the Gulf of Mexico has rightfully pounded BP's stock, but it has also taken down less deserving players like oil field services leader Schlumberger Limited (NYSE: SLB  ) and seismic mapping giant CGG Veritas (NYSE: CGV  ) , two companies which dominate their respective positions in the energy exploration and production industry.

Both of these companies have the strong reputation and global operating footprint to sidestep the Gulf spill. The collateral damage from BP's mistake is providing patient investors with the ability to look beyond the headlines and the opportunity to pick 'em when they're down.

Don't go it alone
That's what Jeff Fisher and the Motley Fool Pro team do -- troll the depths of market sentiment to find investments that perform even in a volatile market. They even take it one step further, using tools like options to pick up investments at bargain prices or produce income even as stock price stagnates.

If you're interested in preventing your investment portfolio from languishing for another decade, enter your email address in the box below to learn more about how Motley Fool Pro can help. You'll even get a free report with five strategies for growing your portfolio in a volatile, range-bound market.

Nate Weisshaar doesn't own any of the stocks or ETFs mentioned above. CGG Veritas is a Motley Fool Global Gains recommendation. Johnson & Johnson and PepsiCo are Motley Fool Income Investor picks. Motley Fool Options has recommended buying calls on Johnson & Johnson and a diagonal call position on PepsiCo. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2010, at 8:16 PM, njckrall wrote:

    15 of American Funds' funds did well in "the lost decade". Yes, there are thousands of badly managed funds, and the index fund wasn't a winner. But some very well-managed funds, along with Dollar Cost Averaging, Automatic Rebalancing, and having a good cash reserve to buy on the dips/plunges is a winning strategy that anyone with a good budget, control of their debt, and some cash savings can employ.

  • Report this Comment On June 17, 2010, at 11:07 AM, orenjikun wrote:

    10 years ago from today was the peak tech bubble - a huge bull market. If you buy in the middle of a bull market, when prices are at the highest, of course you are going to get a low return. So the inference then is that investing in the stock market is a bad proposition? Only if you buy at the highest prices! How misleading... And if you had bought the S&P index 20 years ago, and held until now, you would have gotten a 6.6% annual return.

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