At the other day, I read an interesting commentary by David Snowball. He reflected on a term that’s appearing frequently in the press: "the lost decade.” It refers to the fact that the U.S. stock market, as measured by the S&P 500, has grown by an annual compound average of about 2.8% over the past 10 years. It also compares this with Japan's "lost decade," which featured sharp plunges in value.

Snowball makes some excellent points. For starters, he notes that the decade did still feature a gain for the U.S. market, albeit one that didn't keep up with inflation. That's a far cry from what Japan went through: "During the course of the 1990s, Japanese land values dropped by 70%. The Nikkei 225 dropped around 80% from its peak in 1989 to its trough in 2003."

He also points out that most investors wouldn't have experienced that 2.8% average return because they wouldn't have plunked all their money solely in an S&P 500 index fund all at once at the beginning of the decade. Most people would probably have diversified into various investments, and would have added money gradually, over time.

Still, I think the "lost decade" concept holds some valuable lessons. For example, it reminds us that although the stock market's average historical return is 10% annually, it can fall well short (or ahead) of that over any particular period, especially during the short term. It's easy to forget during the market's many surges that it can also go down.

It also demonstrates the value of longer-term investing, as you're more likely to earn returns that are less extreme over long periods.

Finally, Snowball's thoughts point out the usefulness of investing regularly, over time, and into a range of different investments, picking up additional stocks when they're on sale. For example, you might build a portfolio of individual stocks, with holdings like these:

  • Large-cap stocks, such as Adobe Systems (NASDAQ:ADBE) and United Parcel Service (NYSE:UPS)
  • Mid-cap stocks, such as Sotheby's (NYSE:BID) and Black & Decker (NYSE:BDK)
  • Small-cap stocks, such as Beazer Homes (NYSE:BZH) and Crocs (NASDAQ:CROX)
  • International stocks, such as Toyota (NYSE:TM)

Or you might diversify just as well with less effort, via mutual funds. If you'd like to find some top-notch funds, I invite you to take advantage of a free trial of our Motley Fool Champion Funds newsletter, where I've found a bunch of winners, myself.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Crocs is a Motley Fool Hidden Gems Pay Dirt selection. Sotheby's is a Motley Fool Hidden Gems pick. United Parcel Service is an Income Investor recommendation. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.