Ever since 2010 began, pundits have mocked the stock market's lousy performance over the past 10 years, dubbing it the Lost Decade. As it turns out, though, only a narrow set of investments dropped in value since 2000 -- and as long as you didn't have all your money invested in them, then you would have seen gains in your portfolio.
Betting it all on one benchmark
It's true that when you look at one of the most popular measures of the market's performance, the S&P 500, you see a dire picture of what happened from 2000 to 2009. On average, the S&P lost about 1% each year, even when you include the dividends that its component stocks paid.
Looking at the top stocks in the index, it's not hard to understand where these losses came from. Technology stocks that were hit hard during the bear market that opened the decade, such as Microsoft
Many investors see investing in the S&P 500 as giving them adequate diversification. But if all you own is a stock index fund, you suffered losses when you didn't have to -- because you skipped some of the biggest moneymakers of the decade.
What you left out
The sad thing about what happened during the 2000s is that the S&P was just about the worst place for your money. When Morningstar took a look at how various indexes covering a wide array of asset classes did, it concluded that no matter where else you had put your money, you would've been better off than in large-cap U.S. stocks.
Take a look at some of the numbers:
Asset Class |
Annualized Return, Dec. 1999 to Dec. 2009 |
---|---|
Real estate investment trusts |
10.2% |
Emerging markets equity |
10.1% |
Long-term Treasury bonds |
7.6% |
High-yield corporate bonds |
6.7% |
Small-cap U.S. stocks |
3.5% |
Treasury bills |
2.8% |
International stocks |
1.6% |
Source: Morningstar.
In light of recent performance, some of these may surprise you. Many REITs, such as Simon Property Group
Even among traditional stocks, you had plenty of better choices. Although some of the best performing emerging-market stocks, like Baidu
Go beyond the average
The lesson here isn't that the S&P is a bad place to invest your money. Despite its bad returns since 2000, long-term investors can feel confident that the index will bounce back and give them gains in the future.
What you should take from the past decade, though, is that it's not enough to keep all your money invested in the same big companies. By making sure you own not only large-cap U.S. stocks but also some international stocks, bonds of various types, and alternative investments like REITs, master limited partnerships, and commodities, you'll have a much better chance of capturing good returns even when the S&P doesn't live up to your expectations.
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