Remembering a Lost Decade

Executive Summary

  • 1999 – 2009 was The Lost Decade for many investors
  • Investors in the United States tend to own a lot of U.S. stocks…often too much
  • The performance of large U.S. stocks is often very different from Everything Else in a diversified portfolio
  • Long-term performance cycles have persisted for at least 50 years having a tremendous impact on investors
  • Investors need diversified and resilient portfolios to weather the various performance cycles and get great long-term return

1999 – 2009 is called “The Lost Decade” by investors because the most widely followed stock market index, the S&P 500, returned -2% for this 10-year period (and this includes the reinvestment of dividends!). This is a reminder to investors that large U.S. stocks can go long periods of time without generating any gains.

The fact that investors ended up in the same place they started 10-years later does little to really help understand just how painful this period was for many investors. As the below graph shows large U.S. stocks were up and down like a yoyo during the decade falling by about -50% twice during this period.

More about The Lost Decade

Large U.S. Stocks ALONE is NOT Diversification

A portfolio of 100% large U.S. stocks, the 500 stocks in the S&P 500, is NOT a viable alternative for the vast majority of investors. Such a portfolio is NOT consider diversified even if it does include all 500 stocks in the S&P. Large U.S. stocks alone are too volatile, too risky, and can go for very long periods of time with no gains.

Although large U.S. stocks alone do not make for a diversified portfolio, they are often the starting point. Investors are attracted to the long-term returns that large U.S. stocks have delivered but realize there’s too much risk. Investors then add other types of stocks along with bonds to their portfolio but most often end up with a portfolio with large U.S. stocks being the largest single piece of their portfolio.

The attraction to large U.S. stocks

  • Home bias or natural tendency to own what we think we know
  • Impressive long-term returns
  • Advisor recommendations
  • Commonly known brand name companies
  • News coverage

The fact is that large U.S. stock get a lot of attention. The stock market indices people talk about and you see when you turn on the news are the Dow Jones Industrials, S&P 500, and NASDAQ…all are large U.S. stock indices. When you open your investment statement, comparisons are often to these same indices. The stories you read and hear are about companies such as Apple, Amazon, Facebook, and Walmart…all of these commonly known brand name companies are large U.S. stocks. Large U.S. stocks are simply everywhere and get the greatest attention. Investors are naturally attracted to them.

Investors’ attraction to large U.S. stocks is not a hypothetical concept but very much reality. One example is the money invested in mutual funds, the most popular investment vehicle for investors, and how it is allocated to different types of stocks. As the accompanying chart shows, 79% of all money in U.S. stock focused funds is in large U.S. stock funds. Clearly large U.S. stocks are highly popular and widely owned by investors.

Large U.S. stocks get a lot of attention and attract many investors for a lot of good reasons. The stronger their performance, as with any investment, the more attention and attraction they get. The most recent decade has been a strong one for large U.S. stocks and human psychology tends to make us think that what has happened most recently will continue. When looking at the long-term cycles covering nearly 50 years, we see these strong runs historically have been followed by disappointments.

The important take-away: investors in the United States tend to own more large U.S. stocks in their portfolio than anything else. It’s natural…but can result in long periods of disappointing returns.

Large U.S. Stocks versus Everything Else

Given the natural tendency for U.S. investors to be attracted to large U.S. stocks, building a diversified portfolio becomes one of large U.S. stocks versus Everything Else. You can see in the accompanying table all of the investments we put in the basket of Everything Else…literally everything except large U.S. stocks.

The big news is that The Lost Decade was only for large U.S. stocks. The accompanying graph shows the performance of all these investments. During this Lost Decade large U.S. stocks produced a dismal return but Everything Else moved higher and some significantly higher!

When we combine Everything Else into one group, looking at the aggregate performance of all those things together, compared to the performance of large U.S. stocks you find some very pronounced and long-term cycles. The below table shows a summary of these Performance Cycles.

As you can see from the table, the performance of large U.S. stocks relative to Everything Else has ebbed and flowed for this nearly 50 year period. These long cycles suggest performance seems to be persistent when the winds shift often reaching extremes before reversing.

To see detailed performance for each of the various time periods, click the below button.

See Performance Cycles Details

What’s next and what’s it mean?

What should we expect in the coming years? Will the most recent decade’s trend continue with large U.S. stocks outpacing Everything Else? Or is the past decade just part of a very long-term cycle that may see the winds shift at some point? There’s no way to know for sure but these performance cycles suggest the winds will likely shift at some point and, when they do, could persist for a significant period of time.

The following brings together all the data on one graph covering nearly 50 years and the multiple performance cycles during that time. It shows the rolling 10-year performance of large U.S. stocks versus Everything Else.

Graph Calculations and Explanation

When the trend is toward the top of the graph, when the blue line is high, large U.S. stocks have been performing better than Everything Else. This was the case in the late ‘90s, toward the middle of the graph, and the same currently on the right side of the graph. Again, these are times when we have just completed a decade or longer run of large U.S. stocks performing better than Everything Else.

On the contrary, when the blue line is toward the bottom of the graph, as it was on the far left in the early ‘80s and then again toward the middle to right of this graph around the 2009 – 2010 period, large U.S. stocks have lagged behind Everything Else. Again, this was the case for the years leading up to the early ‘80s and again from 2000 – 2009…”The Lost Decade”.

We don’t know what will happen in the future. It’s reasonable to expect these performance cycles to continue their ebbs and flows and at some point we could see Everything Else perform better than large U.S. stocks. To be clear, this would not require a bear market or big drop in prices for large U.S. stocks, although that too is always a possibility, but could simply be that all of the other investments in a diversified portfolio could become the better performers while large U.S. stocks lag behind.

Now, as always!, is a Great Opportunity for Diversification

Few investors would even consider a portfolio of 100% large U.S. stocks and nor should they. The risk of being in just one type of investment, even as good as it has been long-term, is just too high and the volatility is more than most can handle. Diversification is always the best choice! It’s a proven strategy.

Today we are at a point when large U.S. stocks have had a great run…among the best we have seen in 50+ years when compared to the performance of all other investments. There are times, as we have seen in the Performance Cycles, when a diversified portfolio is going to benefit more from Everything Else…all of the investments other than large U.S. stocks. We could be approaching one of those times.

What does this mean for investors?

This could have huge implications for all investors regardless of your risk. We all tend to get attracted to that which has recently performed the best and avoid those things that have not performed as well. Therefore, investors may be overloaded with large U.S. stocks today. If the cycle does shift, portfolios overloaded in large U.S. stocks could deliver very disappointing returns.

See Portfolio Returns Here

But what if the cycle does not change and large U.S. stocks continue to outpace Everything Else. This is certainly possible. Investors in more diversified portfolios would risk getting lower returns…not negative returns but just not returns that would be as good as large U.S. stocks if they continue to perform better than Everything Else. This is always a risk of diversification but, given our research, I believe the risk and return tradeoff today is very much in favor of the highest amounts of diversification.

Let’s assume we do think this cycle will shift. If you believe this is likely, getting the exact timing right will be impossible (only with tremendous luck will you get perfect timing). This is not about getting the timing exactly right. Instead this is about the next decade and positioning your portfolio so that you have the wind to your back potentially for many years. This is about thinking long-term and building a portfolio that is best for the long-term…this is how you get the best long-term returns.

My advice: you should have no more than 10% of your total portfolio in large U.S. stocks and the rest in Everything Else. This is proven successful! All investors, those who are low risk or high risk or anywhere in between, will be impacted by these performance cycles. Get diversified and preferably Super-Diversified! We can help.


Large U.S. Stocks = S&P 500

Bonds = Mid-term U.S. Government Treasuries

Time Periods

  • 1972 – 1979: 12/31/1971 – 9/30/1979
  • 1980 – 1999: 9/30/1979 – 9/30/1999
  • 2000 – 2009: 9/30/1999 – 9/30/2009
  • 2010 – 2019: 9/30/2009 – 9/30/2019

Mutual Fund Assets

  • Large: includes all funds in the following Categories: Large Blend, Large Growth, Large Value
  • As of 9/30/2019 per Steele Database

See our full disclosure for more details.