The period from 2000 to 2010 is often referred to as “the lost decade” for stocks in the U.S.  Here’s a chart of the nominal total return (including reinvested dividends) of $1,000 invested in the S&P 500 at the end of 1999.  The blue box shows the 10 years over which this broad market investment failed to make money.

I happened to start seriously investing in stocks at the beginning of 2000.  So, this graph approximates my experience.  I was starting to make some money around 2007 when it all collapsed again.  I had to wait another 3 years before I could safely say I had made any money on most of my original stock investments.¹

One way to illustrate the value of reinvesting dividends is to examine only the price changes of the S&P 500 over this same period as shown in this graph.

An investor who spent their dividends along the way had to wait an additional three years to make gains on stocks.

So, Stocks Are Risky?

These graphs may give you the impression that stock investing is a risky business that only sometimes works out.  However, longtime readers know that “the lost decade” was more the exception than the rule.  Long losing streaks for stocks are relatively uncommon historically, and that’s why this unusual period earned a name.

It turns out that the chances of losing money over a decade with stock index funds are pretty low if history is any guide.  Here’s a graph comparing different studies of global and U.S. stock returns showing how often stocks lost money over various investing timespans.

So, the lost decade for U.S. stocks was unusual because such events have only occurred about 13% of the time.  In other posts, I rounded this to “about 10%” for reasons that I won’t rehash here.  However, the lost decade proves that a 10% chance is not a zero chance of losing money over 10 years of investing.  It happened to me, and it could happen to you.

Are Global Stocks Riskier?

The above graph strongly suggests that global stocks (non-U.S. stocks) are considerably riskier than U.S. stocks.  The global stock studies noted in the graph indicate a 16% to 25% chance of losing money over a decade.  However, I’ve noted before this is somewhat misleading because almost every country included in these statistics was completely devastated by the war period from World War I through World War II.  Assuming we don’t have a global multi-decade war soon, which I admit seems possible given the Ukraine situation, the chances of another lost decade appear distinctly less than 25%.²

The Other Lost Decade

But again, long losing streaks should be expected to happen occasionally with global stocks too.  That’s why there’s an even more recent lost decade for global stocks that you may have missed.  Here’s a graph of total returns for Developed Market (excluding the U.S.) stocks over the last couple of decades using Portfolio Visualizer data.

The blue box once again indicates the lost decade that coincided with U.S. stocks, although it was a bit shy of a decade for Developed Markets.  A similar situation occurred for Developed Market stock investors who started at the peak of 2007 as shown by the tan box.

And here’s a graph of just price changes for Developed Market stocks, which excludes reinvested dividends.  This graph starts in 2004, which was the oldest start of detailed price data I could find on the internet.

If you mostly focus on U.S. stocks, it may be surprising that Developed Market stock prices still haven’t recovered from their 2007 peak, a period of 15 years so far.

Developed Markets include countries in Europe, Scandanavia, and Japan.  We can also look at Emerging Market stocks, which include countries like China, India, and a host of other developing nations.  Here’s the total return picture for those stocks.

Emerging Market investors that started at the end of 1999, avoided anything like a lost decade (blue box).  They only had to wait about three years to start making progress again.  However, the other lost decade starting in 2007 (tan box) showed up in Emerging Markets too, and it lasted even longer.

And just for consistency, here’s the graph of price changes of Emerging Market stocks.

Emerging market stock prices also have yet to surpass their 2007 peak.

A Lesson In Diversification

With all these lost decades over the last 22 years or so, you’d think that long-term stock investors must be in sorry shape today.  But all of these stock indices have made money for consistent buy-and-hold investors during the 21st Century.  Here’s a graph showing the total returns on $1,000 in each of these three individual investments.  The bars at the top show the same periods of return stagnation presented in the individual total return graphs from above.

Developed Market stock investors are clearly in the worst shape of the three.  But even here the original $1,000 investment at the end of 1999 is now worth more than $2,600.  And U.S. stock investors have been richly rewarded in the last 10 to 12 years for being patient through the prior decade.

From an emotional standpoint, even with multiple lost decades, an investor who spread their bets across these three assets usually had something to cheer about in their portfolio.  From 2002 through 2007, Emerging Markets were an absolute gem to have in a diversified stock portfolio.  And from 2012 onward, U.S. stocks were a fantastic counterbalance to the relative stagnation around the rest of the world.

Other Ways To Look At It

The ebb and flow of U.S. stocks versus the rest of the world is a pattern that has been getting a lot of coverage recently, given how long global stocks have been underperforming U.S. stocks.  Here’s a graph from Charlie Bilello showing just how unbalanced the relative performance of world stocks has become.

Descending segments of the line in this graph indicate that global stocks were outperforming U.S. stocks.  Ascending segments indicate the reverse was happening.  Using the early 1970s as the starting point, the relative outperformance of U.S. stocks is now way above anything seen in the past.

Another way to look at this pattern comes via a post by Philip Huber.

Again, starting in the early 1970s, we can see multiple periods when global (in this case Developed Market) stocks outperformed U.S. stocks for multi-year periods.

A Diversified Stock Portfolio

If you still aren’t convinced that it might be a good idea to hold some of those miserable global stocks, let’s look at the performance of a diversified portfolio over the last two decades consisting of 60% U.S. stocks, 25% Developed Market stocks, and 15% Emerging Market stocks.  Where do these percentages come from?  They roughly approximate a global (including U.S.) stock portfolio balanced by market capitalization.

Here’s a graph from Portfolio Visualizer comparing the performance of $1,000 invested in the global market cap stock portfolio (blue line) to a portfolio of all U.S. stocks (red line) and a portfolio exclusively of non-U.S. Developed Market stocks (yellow line).  The global market cap portfolio is rebalanced annually.

Perhaps unsurprisingly, the stellar last decade for U.S. stocks has put them ahead in this race at present.  But U.S. stocks were lagging the other two portfolios from 2005 through 2014.  And U.S. stocks didn’t surpass the global market cap portfolio until 2019!  And even today, the global market cap portfolio is still running a close second to U.S. stocks.

Here are the annualized returns (Compound Annual Growth Rate; CAGR) and final account values for each portfolio from the above graph.

• Global Balanced Stocks – 5.77% ($3,618)
• U.S. Stocks – 6.44% ($4,182)
• Developed Market (ex.-U.S.) – 3.29% ($2,100)

U.S. stocks have outperformed the global market cap portfolio from 2000 to today.  But it’s not a blowout win, particularly considering that the last 10 years were one of the strongest and most sustained long-term runups in U.S. stock values in history.  You could bet that the amazing performance of U.S. stocks will continue for decades more, but the history of see-saw performance between global stock classes strongly suggests a regime change will occur in the future.³

Conclusions

When looking across global stock asset classes, you can find plenty of lost decades.  But even so, the twin benefits of a long time horizon and some simple stock diversification can render those loser decades mostly irrelevant.

Also, consider that relatively few of the millions of investors in the world started investing exactly in 2000 or 2007.  And even for those that did, almost none invested one lump sum and never invested again, which is what all these graphs assume.

My experience is more typical of the average investor.  Yes, I started U.S. stock investing in early 2000, but then I continued to buy more stocks using saved income year after year.  Therefore, I “bought the dips” in 2003 and 2008 as well as other times when stocks weren’t so cheap.  So, my dollar-cost-averaged return across the years was considerably better than these graphs might imply.  And some version of a more complicated history of buying (and perhaps unmindfully selling) is true of almost all investors.

This is why mindful investors avoid attempting to time the markets.  If you try to save up bigger bundles of cash in hopes of avoiding a lost decade for one class of stock or another, all evidence indicates that you are much more likely to perform even worse than consistently investing over the long term in almost any stock index fund or funds.  If you buy consistently over time, you sometimes buy the peaks like 2000 and 2007.  But you’re also getting the benefit of buying everything below the peaks and even during some severe dips.

Although everyone is moping about the poor performance of the stock market this year, it’s been a great opportunity to buy some stocks and perhaps avoid your own lost decade.

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1 – I’ve mentioned before that I was originally a stock picker who only dabbled in index funds.  I didn’t switch to a mindful investing approach using only index funds until about a decade later.  So, I had some stocks that performed better than shown in this S&P 500 graph and some that did much worse.  But in aggregate, my experience was very similar to the net result shown in the graph.

2 – I find William Bernstein’s concept of separating “shallow” risks from “deep” risks very helpful.  Yes, it’s always possible that some improbable catastrophic event like a regional war could wipe out the economy of a country you’re investing in.  But it’s counterproductive, and even irrational, to base your entire investing approach on the most unlikely of outcomes.  And in the case of stock investing, a close look at history strongly suggests that stocks are one of the best assets to protect against deep risk as well as shallow risk. 

3 – Note that I’m not falling into the cognitive bias of the Gambler’s Fallacy here.  I’m not saying that U.S. stocks are “due” for a relatively poor performance soon.  I’m simply saying that periods of outperformance have historically never lasted forever.