Wednesday, January 16, 2008

Decade of Decay

It looks like the first decade of century may go on record as pretty mediocre. New BusinessWeek writer Roben Farzad says "Don't look now, but we're putting the final touches on the market's Lost Decade, the worst showing for U.S. stocks since the Great Depression."

Farzad calculates that the S & P 500 needs to zoom ahead by 54% between now and 2010 just to match the anemic returns of the 70's. With 2008 starting off so bad, the market has some real work to do.

The question remains - is this to be expected? I've been saying for years (actually since before this decade started) that returns going forward will probably not be as good as they have in the past, though I do expect returns to be better than the 1.7% average gain since 2000. If you look at the chart you will see a classical event in history - reversion to the mean, meaning good times typically follow bad times and vice versa. The 80's and 90's were spectacular for the markets - this decade, not so much.

Farzad fails to mention that the S & P 500 doesn't necessarily represent a diversified portfolio. US investors who only invested in a diversified portfolio of US stocks (meaning something other than just large growth stocks) they would have an annualized rate of return of 8.18% through 12/31/2007. A globally diversified portfolio would have annualized at around 9.91%, not bad.

What does this mean for stock prices going forward? It probably means they have better prospects.

Scott Dauenhauer, CFP, MSFP, AIF