Lost Decade? Not for SMI Investors
When hearing the latest news on the economy, your reaction should always be, "Oooh, that's bad. But also good."
That's because all economic news is bad for some folks, and yet simultaneously, the same economic news is good for other folks. Usually it's not too hard to figure out which group of folks you're in.
When housing prices ballooned upward in recent years, that was bad for buyers but good for homeowners and sellers. When the balloon popped and foreclosures began escalating, the shoe was on the other foot—bad prices for sellers but good deals for buyers.
When the Fed aggressively lowers interest rates, that's good news for the economy but bad news for savers. If the dollar is weak, that's good for our exporting industries (our stuff is now cheaper) but bad for importers of foreign goods and services (their stuff is now more costly).
You can look at the current strength of the economy, the degree of inflation, the level of interest rates, the decline in housing prices, the earnings of corporate America, proposed new tax legislation, and so on, and always find some groups who are better off as a result of changing economic conditions and others who are worse off.
These groups aren't always evenly balanced: some events may be good news for many and bad news for relatively few, or vice versa.
I got to thinking about all this when reading a rather gloomy piece in The Wall Street Journal recently. Its title — "Stocks Tarnished by 'Lost Decade'" (subscription required). Here's a brief taste:
Over the past 200 years, the stock market's steady upward march occasionally has been disrupted for long stretches, most recently during the Great Depression and the inflation-plagued 1970s. The current market turmoil suggests that we may be in another lost decade.
The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds. ...
In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over.
The article went on to point out that the S&P 500 performed well below its historical norm over the past decade. By my tally, it returned just 3.5% annually (including dividends) for the 10-year period that ended March 31. After adjusting for inflation, that's a meager 0.7% average real return.
So, is this bad news, or good news? Both, of course. It's disappointing news for investors who have invested solely in an S&P 500 index fund for the past 10 years. But, as it turns out, history says it's good news for people who can invest in such a fund for the next 10 years.
Why is that? Because long periods of below-average performance in stocks are typically followed by periods of above-average performance.
I went back and looked at every rolling ten-year period since 1950. Only about 1 out of 16 times will you find one where the S&P 500 turned in less than 4.0% annually over a decade. On those rare occasions, the S&P 500 returned, on average, 15.0% annually in the ten-year period that followed. The returns ranged from a low of 11.3% to a high of 18.2% annually.
So, an article that conveyed bad news concerning the past actually contained the seed of some very promising news for those looking forward.
But for SMI readers following our fund Upgrading strategy, the good news doesn't stop there. That's because Upgrading consistently outperformed the S&P 500 over the past decade (7.3% per year after inflation versus the aforementioned 0.7%).
So, if Upgrading generated such healthy gains during a period that The Wall Street Journal lamented as being a "lost decade," how much more should we look forward to the 10-year period just now beginning where, historically speaking, we would expect a much more profitable market environment?
A lot. 
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Austin Pryor is the founder and publisher of the Sound Mind Investing newsletter and website. His desire is to help people understand and apply Biblically-based principles for making spending and investing decisions, ultimately helping them have more so they can give more. |
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