Contrary to a plethora of market pundits, we haven't just emerged from a "lost decade." The doomsayers cite the S&P 500's average return of -2.7% over the past decade; even when you factor in dividends, that figure still didn't escape the red. But I still think there's more to the story. Despite the 2008 market crash, the decade wasn't so grim for most of us.

Bear in mind that the S&P 500's return reflects the performance of money invested in the index at the beginning of 2000, and evaluated at the end of 2009. I doubt many of us invested our net worth in the market in early January 2000, only to withdraw it tearfully on New Year's Eve 2009.

Instead, most of us continually invest in the market, via automatic contributions transferred from our paychecks into 401(k) accounts, or occasional lump-sum investments in our IRAs and regular brokerage accounts, or even regular investments in direct investing plans.

Yes, some of our dollars were in the overall market at the beginning of the decade, and remained there at the end of it. But many other dollars were added throughout the decade. Consider the average annual returns (excluding dividends) of several adjoining decades:

Period

Average Annual Change in S&P 500

January 1, 2000 to Dec. 31, 2009

(2.7%)

January 1, 1999 to Dec. 31, 2008

(3.0%)

January 1, 1998 to Dec. 31, 2007

4.2%

January 1, 1997 to Dec. 31, 2006

6.7%

Data: Yahoo! Finance. Does not include dividends.

See? You get significantly different results depending on when you invest, even if the difference is just a year or two. And if you factor in dividends, your returns will be rosier still.

Beyond the index
Furthermore, we investors don't always invest our entire nest egg in the S&P 500. Over long periods, that index has admittedly averaged 10% annual growth, and even an average of 7% or 8% tops many other alternatives. Still, we tend to spread our money around a little more than that.

The S&P 500 index parks us in 500 of America's biggest companies, encompassing most or all of the blue chips you can think of. But there are other companies worth an investment, including these:

Asset Class

Representative Companies

Small-cap stocks

Cell Therapeutics (NASDAQ:CTIC), Conseco (NYSE:CNO)

Mid-cap stocks

Patriot Coal (NYSE:PCX), Maxim Integrated Products

Foreign stocks

Nokia (NYSE:NOK), Honda Motor (NYSE:HMC)

Emerging-market stocks

Sasol (NYSE:SSL), Infosys (NASDAQ:INFY)

International stocks can help you benefit from currency fluctuations, while small-cap stocks often offer a greater chance of outsized returns. To fully appreciate how helpful diversification can be, check out these average annual returns over the past "lost decade" from various categories of investments:

Asset Class

Past Decade Average

REITS (Real Estate Investment Trusts)

10.2%

Emerging Markets Stock

10.1%

TIPS

7.7%

U.S. Small-cap Stocks

3.5%

T-Bills

2.8%

Data: Research Affiliates.

If you'd had at least some of your money distributed into categories other than large American stocks, your overall average would likely have been higher than anyone solely invested in the S&P 500.

Rob Arnott of Research Affiliates recently pointed out that investors who diversified into lots of categories, such as foreign currencies, real estate, emerging market bonds, and more, could have averaged 8.5% annually over the decade. And just by substituting a broader index for the S&P 500 as part of a somewhat conventional 60% stocks/40% bonds split, investors could have averaged more than 5%.

Variety delivers
Again, you're not making the worst mistake if all your money is in a broad-market index fund. Doing so will place your money among the majority of the U.S. market, including plenty of companies with considerable international operations, and give you returns that beat most mutual funds.

But to aim a little higher, consider diversifying just a bit beyond that. In our Rule Your Retirement newsletter, Robert Brokamp offers several model asset allocation strategies. To see them all, along with a pile of stock and fund recommendations, try the service free for 30 days.

Longtime Fool contributor Selena Maranjian owns shares of Maxim Integrated Products. Nokia is a Motley Fool Inside Value selection. Sasol is a Motley Fool Global Gains pick and a Motley Fool Income Investor recommendation. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.