By Steve Tepper, CFP®, MBA
Remember the end of the 2000s? Or would you rather forget? Plummeting stock prices, growing financial hardship, a presidential race thrown into turmoil by an economy in recession. Thank goodness those days have passed. (Insert head-slap emoji.)
Back then, one hot topic in the financial press (and picked up in the wider media) was the concept of the “Lost Decade,” specifically a 10-year period in which capital markets gave investors no return. This had followed an unprecedented period of peacetime expansion during the 1990s.
The numbers back up the headlines. Here is the return of the S&P 500 for the ’90s and the naughts:
No doubt the 2000s were a troubling period for investing. There were good years in there, but we also had the dot-com bubble burst and 9/11 at the beginning, and of course the Great Recession at the end, which wiped out all gains. But the financial news did not stop with reporting numbers. Do they ever? That doesn’t sell papers. (I think they were still selling papers in 2009, right?)
Financial experts wanted you to know what the numbers meant, and many said capital markets weren’t a good place to get rewarded for your investment risk. They implied if markets could be bad for 10 years, why not 20? Or 30? Or the rest of your life?
Well, technically there is nothing to say we couldn’t see a lost 20, 30, or more years. But investing is about probability. If you are investing for 30 years, you are assuming the overwhelming probability that over the next 30-year period, markets will be up, and the very, very strong probability that markets will be way, way up. You have no guarantees. Just very favorable probabilities.
Think about an NBA player shooting jump shots in a game. If he’s any good, he probably averages around 50%—he makes about half his shots and misses about half. Ever see a player go stone cold and miss shot after shot after shot? It happens. Science has still not explained the phenomenon that when it does happen, 100% of the time it’s someone on the team you’re rooting for.
Players miss 10 shots in a row sometimes. It happens. How about 20? Or 30? What’s the most? Well, I happen to remember this, and I’m not sure why: It was a record-setting night for Tim Hardaway in Minnesota back in 1991. (OK, I looked up the city and year.) Hardaway would later have some good years with our local Miami Heat, but this was earlier in his career, when he was playing for the Golden State Warriors. That night, he went 0 for 17 to set an NBA record for futility that still stands today. No one has ever missed 20 or 30 in a row.
So if you’re the head coach and your star point guard just pulled off the most miserable performance of all time, what do you do? Sell him to the Milwaukee Bucks at a fire sale price? That wasn’t Coach Don Nelson’s decision. Probably gave him a “we’ll get ’em next time” kind of speech and sent Hardaway back out on the court three nights later against the Lakers. He finished the night 13 of 21 for a shooting percentage of .619, which experts call “really good.”
So our investing decision following the Lost Decade should have been “we’ll get ’em next time” and see how the next decade performed. And it turns out next time was really good:
Concluding that the lost decade was not a signal to sell ended up being a really good strategy a decade ago. And while there’s one bad period in that chart, your overall return for the 30 years isn’t bad: almost exactly 10% per year.
Do you know what happens to $100,000 invested with a 10% return for 30 years? It turns into more than $1.7 million. (OK, taxes, management costs, and volatility reduce that a little. It’s still gonna be a lot.)
If I haven’t made the case yet, let’s go back to the NBA once more: A good NBA player will make about 50% of his jump shots, which of course means he will miss about 50%. Therefore, half his shots have a positive return (2 or 3 points) and the other half are “lost,” providing no return at all. The best way for him to be more successful, therefore, is to take fewer missed shots.
Yeah, it’s a ridiculous strategy, for one obvious reason: He has no idea which shots he’s going to miss until after he takes them, at which point it is too late. Capital markets are the same. If we knew which decade is going to be lost, we could avoid investing during it. But we only know it’s lost after the decade ends.
Theoretically, every day, week, month, or year that the wider capital markets have a negative return is a “lost” day, week, month, or year. But to draw conclusions about investment strategy from those periods that don’t reward us is a big mistake and is likely to hurt our overall performance.
And just one more factoid: The record for the most missed shots in an NBA career is held by Kobe Bryant. Man, the Los Angeles Lakers must feel pretty silly trading for him on draft day in 1996. Yet somehow, despite getting a zero percent return on 14,481 of Kobe’s shots over the next 20 years, they managed to win five NBA Championships. 14,481 missed shots! That’s a heck of a lot of “we’ll get ’em next times.” And a lot of reward for the strategy.
Past performance is no guarantee of future results. Indices are not available for direct investment.