In this segment from Motley Fool Answers, the cast talks about a few "that will never happen" moments in the world of economics and finance that -- surprise! -- actually happened. In this case, they tackle an idea that lies at the heart of Foolish investing: a long-term outlook. But as you will see, even a full decade has at times been insufficient during some of the worst downturns in history.
A transcript follows the video.
This video was recorded on Nov. 1, 2016.
Alison Southwick: The next one. They said stocks will never lose over a 10-year period. Come on!
Robert Brokamp: So, if you look at data for U.S. large-cap stocks since 1926 (going to Ibbotson Associates) -- most of that period, that's the S&P 500, although before 1957, it was the S&P Composite -- the worst decade for stocks was actually very recent (1999 to 2008). It lost an average 1.3% a year. Now, in 1999, I was at The Motley Fool, as was Rick, and most of us were engulfed in the dot-com delirium, and if you said to any of us, "Oh by the way, the S&P 500 is going to lose money over the next decade," we wouldn't have believed you.
There were two decades that included the Great Depression where it lost a little bit of money, but not very much. And you could even rationalize that by saying, [back in] the Depression, stocks lost money over a decade, but we also experienced severe deflation. The stock market went down, but so did prices, so your performance didn't actually lose purchasing power. From 1999 to 2008, the S&P 500 lost money, and we had inflation, so people were actually worse off.
By the real lesson of that period is that you shouldn't invest in just one asset class. So, while U.S. large-cap stocks lost money over that decade, cash made money. Bonds made money. International stocks made money. Small caps made money. So, anyone who had a widely diversified portfolio still did pretty well. It's the people who had their portfolios concentrated in an S&P 500 index fund who didn't do so well.
Jim Royal: And again, it's a testament to why you need to continue to invest every month or every year, because nobody's putting all of their money in in 1999 (hopefully, fingers crossed). They're buying throughout the period, and so it's a testament to you to keep buying. And buy more when it looks cheaper.
Brokamp: Right. And if you're retired, it's a testament to having a good five years' worth of your income out of the stock market so you're not constantly selling a portfolio that is constantly going down.