Is Another Lost Decade Coming for Stocks?

The plummeting financial markets in 2008 scared a lot of investors out of stocks. Yet despite the fact that those steep declines brought big losses to shareholders in a hurry, it's only now that the full brunt of the longer-term trend has become clear.

By now, you've probably heard about the lost decade for the stock market. Over the past 10 years, the S&P 500 has fallen more than 300 points or 2.5% annually. Even taking dividends into account, index-fund investors have lost money in S&P funds. And as we head into 2010, the relative losses will likely hit their worst point as the decade-ago comparison hits the 2000 market peak.

Where'd that decade go?
Some investors see that as a decade wasted. Those who prudently scraped and saved to invest regularly have gotten pretty much no reward at all. That's especially maddening in light of all the attention that less responsible parties -- such as overextended mortgage borrowers and overleveraged Wall Street companies -- have gotten from government bailouts and support programs.

In fact, if you invested in the wrong stocks, you may well have done a lot worse. Leaving aside for the moment colossal implosions like General Motors, Bear Stearns, and Washington Mutual, even these still-surviving companies haven't done any favors for their shareholders lately:

Source: Yahoo! Finance.

To add insult to injury, think about the additional risk you took on in the hope of earning higher returns -- only to get slammed by two bear markets between 1999 and now. You expected stocks to give you the outsized returns they have historically, but the script didn't play out the way you expected.

A big opportunity cost
But the fact that you've lost money is only the tip of the iceberg. Even worse is the fact that you could have made money by investing in lower-risk investments. Just look at these alternatives:

• If you'd simply put all your money in a Treasury money market fund back in 1999, you would have earned an average of nearly 3.0% annually since 1999, increasing your money by over a third during that 10-year period.
• If you'd been willing to lock up your money, you could have invested in a 10-year Treasury note with a yield of 6%.
• An inflation-adjusted Treasury bond auctioned in 1999 would've paid you over 4%, plus you would've gotten an additional boost from its inflation adjustments.

And those returns were all guaranteed by the full faith and credit of the U.S. government. If you were willing to take on some risk, you could have done even better. Precious metals skyrocketed, with gold going from around $300 in 1999 to nearly $1,100 today. Similarly, silver rose from between $5 and $6 a decade ago to over $17 today.

Some now believe that investing in stocks was the dumbest move they ever could've made. But I think there's more to it than that -- and that stocks still hold the best promise of a prosperous financial future for most investors.

Why stocks aren't down and out
The reason I think stocks aren't dead is that the current 10-year comparisons aren't particularly fair. The starting point came from the tech boom of the late 1990s, which in hindsight was clearly unsustainable. Of course, that doesn't make the losses any less real if you kept investing in stocks throughout 1999 and 2000. But if you kept adding as stocks fell from 2000 to early 2003, then you got shares much more cheaply along the way.

Looking backward is a loser's proposition for an investor. Although the past can give you some comfort, it's important to look forward to the particular situation you face and make investing decisions that reflect your expectations for the future.

At the root of the problem, if you think that the doomsayers are correct and the financial system is primed for imminent collapse, then you'll do better to get all your money out of the stock market -- and maybe even buy some leveraged bear ETFs.

However, we've faced similarly dire situations in the past and found ways to get out of them. That's no guarantee that this time will work out as well. But given how big a stake people have in making things succeed, betting on another 10 years of declines isn't something I'd recommend.

Still worried about your investments? Alex Dumortier is too -- and he can show you how to protect your assets from the mother of all bubbles.