Was it really a Lost Decade?09-08-2010 |
Many have claimed that the decade of the 2000s was a lost decade for stock investors. When you look at the returns of the S&P 500 index over the decade, it is hard to challenge the validity of this claim. For the period of December 31, 1999 through December 31, 2009, the S&P 500 index had an annualized simple price return of -2.72%. When dividends are factored in, the results do not get much better as annualized total return for the S&P 500 index (with dividends reinvested back into the index) over the same timeframe was -0.95%. This marked the first time since the 1930s that a decade produced a negative simple price return for the S&P 500 index and the only decade that the S&P 500 index ever produced a negative total return since our data sources began tracking the index back in 1926.
However, one must remember that although the S&P 500 index is often viewed as being indicative of the stock market in general, it is not the only place for equity/growth investors to invest. Essentially, the S&P 500 index represents the 500 largest companies in the U.S. While it can be argued that it is a good barometer of U.S. Large Cap companies, it is hardly the best representations of available investments in the market today. With other asset classes available to individual investors such as U.S. Small Cap, U.S. Mid-Cap, International – Developed Markets, International – Emerging Markets, Commodities, REITs and Fixed Income (yes, Bonds can find a home in a diversified growth portfolio as well), to name a few, before a claim of a lost decade can be verified, one must look at the performance of these other asset classes as opposed to basing a conclusion on the performance of one asset class.
Let’s examine the returns of several other notable indexes over the decade of the 2000s.
Annualized Total Return 12/31/99 – 12/31/09
S&P 500 Index
Domestic Large Cap
S&P 400 Mid-Cap Index
S&P 600 Small Cap Index
Domestic Small Cap
MSCI EAFE (Net) Index
International – Developed Markets
MSCI EM Emerging Markets (Net) Index
International – Emerging Markets
Barclays Capital Aggregate Bond Index
Domestic Fixed Income
Source: Wells Fargo Advisors. Past performance is not an indication of future results. S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index. You cannot invest directly in an index.
A quick review of the table above shows that the only place that a “lost decade” took place was in Domestic (i.e. U.S.) Large Cap. What these results also show, or perhaps, is the importance of asset allocation and the need for proper diversification with a portfolio oriented towards long-term growth. For example, let’s assume that a portfolio was equally weighted across the 6 asset classes, as represented by their associated indexes above, for the ten year period in question and was never re-balanced or adjusted. The annualized total return of this hypothetical, more diversified portfolio would have been 4.84% as opposed to the -0.95% annualized total return of the more Domestic Large Cap focused S&P 500 index over the same timeframe. While we are not necessarily advocating this simplistic of an approach to asset allocation, we do believe that proper asset allocation could have helped individual investors better navigate “the lost decade.”
Asset allocation remains of the upmost importance, from our point of view at Hennion & Walsh, and should always be constructed in accordance with one’s investment objectives, investment timeframe and tolerance for risk. While past performance cannot guarantee future results, and asset allocation cannot ensure a profit or protect against a loss, applying a historical perspective and maintaining an appropriate strategic asset allocation can help provide comfort and direction to investors during periods of great volatility.
When implementing asset allocation strategies, we have found that it is becoming increasingly more common to utilize Exchange-traded Products (“ETPs”) in addition to Mutual Funds, Stocks and Bond, for certain asset classes, styles and sectors. ETPs consist of Exchange-traded Funds (“ETFs”) and Exchange-traded Notes (“ETNs”). ETPs themselves continue to grow in popularity among portfolio managers, financial advisors and individual investors. According to the Investment Company Institute (“ICI”), as of July 2010, there are now 891 ETPs with over $821 billion in assets. ETPs are now available for a wide range of equity asset classes, sub-classes, styles and sectors as well as fixed income, commodity and foreign currency categories on a long and short basis. Investors, who are considering adding a wider range of asset classes, including available alternative and hybrid investment strategies, may just find the solutions they are looking for in the ETP universe.
However, as with other security types, investors should educate themselves on the intricacies of the ETP marketplace and consult a professional advisor as appropriate.