Some people lament over “the lost decade” that we might have experienced in the stock market during the first decade of the 21st century. During this time, it’s thought that as investors, we not only failed to make money, but, as the term suggests, we actually lost money. So, the thinking is that we would’ve been poorer at the end of the decade than at the beginning of it.
And because of all this chatter, maybe you’re scared to put your money in the stock market, either for the short term or long term. Maybe you’ve lost faith in the market’s long-term potential to help you make money.
But there’s an important question to consider. And that question is simply this: Is “the lost decade” a real part of our history? In other words, did we really experience a period where we lost money?
I’m not entirely convinced that we did.
“Why not?” you ask.
Well, the first reason is because we haven’t come to a complete agreement as to when a decade begins. For instance, did the first decade of the 21st century begin on January 1, 2000? Or was it January 1, 2001?
And as a result, did it end on December 31, 2009? Or December 31, 2010? As you might’ve guessed, some people think it’s the former, while others think it’s the latter.
Who’s right? Who knows.
Now, you might be thinking, “Why does this even matter?” Well, this is important because if we look at the data for these two different periods, we get slightly different results.
And to show you what I mean, let’s look at the results from the Vanguard 500 Index Fund. This fund invests in stocks in the S&P 500 Index, which tracks the results of 500 of the largest companies in the U.S.
Here’s how it performed from 2000 to 2009:
| Year | Growth Rate |
| 2000 | -9.06% |
| 2001 | -12.02% |
| 2002 | -22.15% |
| 2003 | 28.50% |
| 2004 | 10.74% |
| 2005 | 4.77% |
| 2006 | 15.64% |
| 2007 | 5.39% |
| 2008 | -37.02% |
| 2009 | 26.49% |
Now, taken as a whole, all of these numbers average out to a loss of about 1% each year over the 10 years. So, one way you could think about this is that $1,000 invested at the start of this period fell to $901 at the end.
But, there’s another way to think about this. You see, instead of investing the entire $1,000 in the beginning, if you invested $100 at the start of each year, you would’ve ended up with $1,048.
In other words, you wouldn’t have lost money. You would’ve made money. (By the way, investing regularly is a concept that most people who’ve successfully built wealth accept and practice.)
So, what made the difference in this second scenario? Well, the losses in 2000, 2001, 2002, and 2008 gave you an excellent opportunity to purchase more shares at much lower costs. And owning all of these additional shares put you in a prime position to benefit from the growth in the good years from 2003 to 2007, as well as in 2009.
A Different Time Period
Ok. Next, let’s make a slight switch at look at the same fund’s results from 2001 to 2010:
| Year | Growth Rate |
| 2001 | -12.02% |
| 2002 | -22.15% |
| 2003 | 28.50% |
| 2004 | 10.74% |
| 2005 | 4.77% |
| 2006 | 15.64% |
| 2007 | 5.39% |
| 2008 | -37.02% |
| 2009 | 26.49% |
| 2010 | 14.91% |
Now, with a change of just a single year in the reporting period, these numbers work out to a gain of 1% each year over the 10 years. Here, if you invested $1,000 at the start of this period, you received $1,139 at the end. But on the other hand, if you invested $100 at the start of each year (for a total investment of $1,000), you would’ve ended up with $1,215.
So, can you see how changing both the time period as well as the method of investing can give you different results?
But wait, there’s more. Now, thus far, we’ve only seen the results from the largest companies in the U.S. But, the stock market is made up of more than just large companies.
For instance, there are stocks of small companies that are currently priced below what they may actually be worth. And because of this, you can own them for what may turn out to be bargain prices.
In fact, there are some well-respected investors who believe that these types of stocks are worth adding to your investment portfolio. So, what if we looked at this other part of the market?
A Different Part of the Stock Market
Now, to do this, let’s look at the results from the Vanguard Small Cap Value Index Fund. This fund invests in stocks in the CRSP US Small Cap Value Index, which tracks the results of over 800 small value companies in the U.S.
Here’s how it performed from 2000 to 2009:
| Year | Growth Rate |
| 2000 | 21.88% |
| 2001 | 13.70% |
| 2002 | -14.20% |
| 2003 | 37.19% |
| 2004 | 23.55% |
| 2005 | 6.07% |
| 2006 | 19.24% |
| 2007 | -7.07% |
| 2008 | -32.05% |
| 2009 | 30.34% |
Now, if we combine all of these numbers, this works out to an average gain of more than 7% each year over the 10 years. What this means is that if you invested $1,000 at the start of this period, you would’ve ended up with $2,097 at the end.
In other words, you would’ve more than doubled your money. And again, if you changed the reporting period from 2001 to 2010, you would’ve made a little more money.
So, what are the key takeaways here?
- Depending on the timeframe you look at, the way you invested your money, and the part of the stock market where you invested your money, “the lost decade” may not apply to you.
- Invest consistently, and hold on to your investments for a decade at the very least, if not longer. We’ve seen how regular investing could turn a losing investment into a winning one.
- Consider investing in an index fund that tracks more than just the largest companies in the U.S. For instance, owning an index fund that tracks the total U.S. stock market is a good place to start. And in addition to this, an index fund that tracks small value companies in the U.S. may be a worthwhile addition to your investment portfolio as well.
