In this case we are talking about domestic equities. And talk about what a bad decade it was. As 2009 winds down it is clear that the buy-and-hold for the long term crowd was a big loser this decade as the stock market essentially went nowhere, albeit with some notable volatility. After taking into account inflation domestic equities were a net loser. In short, the theoretical lessons on the riskiness of equities became a reality this past decade.
Tom Lauricella in the WSJ has all the numbers in his piece. While noting there have been worse ten-year periods for equities, the period of 2000-20009 turns out to be the worst calendar decade since the 1820s. In terms of the human costs those individuals who were relying on equities to continue their double-digit annual returns are now facing diminished expectations.
Joshua Brown at The Reformed Broker has a graph depicting the returns to the major asset classes for the past decade. Clearly showing domestic equities as a laggard.
Barry Ritholtz at The Big Picture notes that the performance of equities in this decade is not all that surprising given the strong performance of the prior two decades. Ritholtz writes:
Repeat after me: There is no free lunch. A decade of out-performance will be paid back one way or another.
Eric Falkenstein at Falkenblog notes how the consensus has shifted on the level of the equity risk premium (ERP). Estimates of the ERP have likely been halved in the past decade going from 6% down to at or below 3%. Which is why some have likely written off equities as a core investment.
Contrarians can take some hope in the idea that after this decade equities have been left for dead. Julie Segal in Institutional Investor notes the many ways in which professional investors have moved away from equities in search of more reliable returns. To some the death of the “equity culture” means it is now safe to invest in equities.
Vincent Fernando at The Money Game takes just this tact in analyzing the above article. He notes how we can easily make investing decisions more difficult than they need to be. Fernando writes:
The mess of finance and investing theory can sometimes confuse us from simple truths — if you’re a future buyer, then cheaper, less hyped assets are better. Investor distate for stocks would mean a great buying environment going forward, and rather than the party being over… it would be just beginning.
All this begs the question whether the next decade will be any better. If you take a mean-reversion sort of approach you would think things would have to be somewhat better. However some analysts believe stocks still have a headwind entering the next decade: overvaluation.
Nothing like the overvaluation facing stocks at the end of 1999 notes Henry Blodget in a discussion with Aaron Task at Tech|Ticker. But still notable. From the Lauricella piece Jeremy Grantham estimates large cap US equities as being 30% overpriced. Any equity market overvaluation would likely be a drag on returns over a decade-long period.
Fortunately for investors who diversified their portfolios away from equities and outside the US the decade was not a total disaster. James Picerno at The Capital Spectator highlights the many (all) asset classes that outperformed domestic equities. However looking out over the next decade yields less than satisfactory signals about prospective asset class performance. Picerno notes the picture is at best, murky at the moment.
Whether any of this means the 2010s will bring back a productive era for buy-and-hold is still an open question. It will be interesting to see what lessons investors take away from this most difficult decade in equities. Equities clearly are a risky asset class. The question is whether that risk has been properly priced in at this point in time. In any event you need to have a plan going into the next decade, because investing by the seat of your pants is only likely to lead to another lost decade.