Investing Lessons From The Lost Decade

I was recently looking at some stats regarding the US Market (Wilshire 5000 Total Return index).  As of February 28, 2010, over the last 10 years the market return was 0.1%. Hmmm. That’s not very high. That means for the last ten years, if you invested in the Wilshire 5000 you would have almost nothing to show for it — you would have done better by simply keeping your money in a saving account or a money market mutual fund.  Professional financial folks call this decade ‘The Lost Decade’ because the market is right back to where it was 10 years ago.

However, in every economic crisis there is always great news.  That became clear during the 2008-2009 economic events.


Photo by David Blackwell via Flickr.

5 Investing Lessons From the Lost Decade

I opened my Roth IRA in the summer of 2000 – one decade ago.  I use part of my Roth IRA to fund my kids’ college and part of it to fund my retirement.  Therefore, it would seem as though I should be depressed about the lost decade.  However, I think the lost decade has been great for young investors.  In fact, personally, I would not mind a back-to-back lost decade.

There are lessons and good news from the lost decade.

The Importance of Dollar Cost Averaging

If I had put money in the market 10 years ago and tried to pull it out today, it is quite possible that I would have nothing to show for my investing efforts.

However, if a person was investing on a regular basis through all of the downs and ups along the way, they would have actually made some gains over the last ten years.

The Younger You Are, the Lower the Better

When the market goes down, it is typical for people to panic.  There must be some kind of sympathetic genes that we all possess because if everyone else is complaining about the market being down, we figure that we should also complain.

However, the younger you are, the more you should want bear markets.  The fact that the market has been up and down just means younger investors have been able to position themselves really well for the future.

A major reason why young people don’t start investing young is because they feel intimidated by the process.  The obvious solution is to learn how to start investing so you can start to build your returns.

Your Emotions Are Your Enemy

I’ll be honest that with stocks now up 50% over the last year, it feels easier to buy.  But that is not how investing works.  When everyone is yelling about the collapse of the market, you should be buying.  When everyone is shouting — buy now!, you might need to slow down.

Anyone who buys and sells based on emotions is likely to lose out.  Here are some common sense investing rules to help give your investing some structure.

I recently read that Americans net worth would need to increase 21% to get back to pre-recession highs.  My reaction was the same as the author — why?  I suspect (in fact, I know because you can see what the market did) that far too many people panicked and sold their investments.

I stuck with a value averaging investment strategy where I tried to keep up with the declining market by investing more money.  Unfortunately, the downward turn was too much for me to fund, but those hard buy decisions (after months of losses) actually helped my net worth.

The Importance of Debt Free Living

Markets are unpredictable because people are unpredictable.

Your investing experience can be extremely positive or negative based on your overall financial health.  It is important to get out of debt before you start investing.  Over the last decade, you could have been paying more money down on your 10%+ in car loan payments or credit card debt, but instead you decided to invest in the market.  Unfortunately, at this point, it is evident that you might have been better off getting your debt in order before investing.

The emotional impact of investing losses are minimized when you are financially healthy.  If you are investing and in debt, you will feel the emotional pain of every market drop.  If you avoid the debt bondage lifestyle investing is less emotional

The Lost Decade Teaches You To Have An Investing Plan

Put your investing plan in place and move along.  Make decisions based on that plan — not based on your emotions.  And remember, when there is bad news for everyone, there might just be good news for you if you’re willing to really evaluate the potential of every situation.

About the Author

By , on Apr 9, 2010
Craig Ford
Craig Ford is a fulltime missionary in Papua New Guinea who writes Money Help For Christians and Help Me Travel Cheap, a frugal family travel blog. He is the author of Money Wisdom From Proverbs, has a Masters of Divinity degree, and (most importantly) eats homemade pizza with his family every Friday night.

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Leave Your Comment (5 Comments)

  1. Lorne Marr says:

    Correct, safety of buy and hold strategy safety is a myth. you offered Wilshire 5000 , I say look at the Nikkei. You invested in 1984? You earned nothing. You invested in 1990? You earned nothing. You invested in 1995? 2000? 2005? Today you are probably in minus! If you want profits, well, you have to be active player. Or go and buy government AAA bonds (but who knows if this continues to be safe in upcoming years…). Otherwise, you always have to understand the risk…

  2. Kristine says:

    I wholeheartedly agree that some young people do not know how to invest. They either follow along with the crowd, or don’t invest at all.

    The thing about not having a knowledge base of investing, is that it is hard to keep emotions at bay when things go bad. I have learned that if I am going to invest in something, I want to be able to explain how the investment works. This is my plan when it goes well, and this is my exit strategy. I also want to invest in things that I enjoy because the outcome of the investment is ultimately my responsibility. It really is about the investor, not the investment.

  3. Good lessons across the board, but I think you leave out the most important lesson of all– appropriate asset diversification (see http://thebizoflife.blogspot.c.....nvest.html ). The ’00’s were a lost decade primarily for large cap investing, both domestic and international. However, for the decade REITS returned 175.6%, domestic small cap value 121.3%, international small cap value 198.6%, emerging markets large cap 154.3%, emerging markets value 212.7%, and emerging markets small cap 176,7%…… not to mention boring US bonds chipping in 5 – 8% a year on average, and for the hard currency folks gold climbing from $300 to $1100. So hardly a lost decade at all for those properly diversified. Nobody knows what the next decade will hold, so, again, it is vitally important to own a broad range of asset classes. Only owning something like the Vanguard Total Stock Market Index (which is essential a US Large Cap asset) does not cut it to my way of thinking.

  4. cm says:

    “Dollar cost averaging” is nonsense; the only thing important about it is to avoid it. It’s just a device of stock brokers to get clients to invest more than they would be afraid to if they invested it all at once, but there is no mathematical reason (or economic reason) why it would advantage investors.

    Also, why should blind investing — during ups and downs in stock prices — be a wiser strategy than watchful investing?

  5. James says:

    i personally thought 2009 was going to be a much tougher year on the Dow than it was. i was ready to jump in but did not feel confident in the market. hind sight is 20/20 cus the market has been rockin

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