2000-2009: The Lost Decade … Or Was It?

The end of 2009 marked not only the close of a challenging year, but the close of a decade unique in the annals of investing. For the first time since the inception of the Standard & Poor’s 500-stock index in 1926, the index posted its first negative “named” decade ever (i.e., 1960s, 1970s) from 2000 to 2009. If you invested $1 in the S&P 500 in January 2000, you would have had 91 cents in December 2009.

Even during the Great Depression in the 1930s, the S&P 500 rose, albeit with a gain of less than one percent. The index enjoyed its best 10-year stretch in the 1950s, with a 19 percent return. The 1990s had the second-best performance period with a gain of 18 percent.

So, were the 2000s the “lost decade” for investors? Maybe it was for some, but not for all.

Keep in mind that the S&P 500’s loss from 2000 to 2009 represents only investments made in U.S. large-capitalization equities. Investors who maintained well-diversified portfolios over the past 10 years actually fared much better. Let’s take a look at how some other asset classes performed on an annualized basis from January 2000 through December 2009:

Asset Class

Investment Index

Total Return

U.S. Large Cap

S&P 500

-1.0%

U.S. Large Cap

Value

Russell 1000 Value

2.4%

U.S. Small Cap

Russell 2000

3.5%

Emerging Markets

MSCI Emerging Markets

9.8%

U.S. REITs

Dow Jones U.S. Select

REIT

10.6%

Clearly, investors who were disciplined and invested in a basket of diverse U.S. and international equities, as well as emerging markets funds and bonds, experienced positive returns. The lesson here is to maintain a well-diversified portfolio with different asset classes with low correlations to one another. This ensures you are not dependent on any single asset class to achieve your investment goals. (Morningstar.com has a number of free online tools to help you analyze your portfolio and assess your asset allocation to make sure you’re not too heavily invested in any one sector.)

Remember that successful investing in 2010, and every year, is not about finding the hot stock, the hot fund or the hot sector. Nor is it about trying to time when to get in or out of the market. Instead, it is about developing an asset-allocation strategy that meets your risk tolerance, time horizon and individual goals.