It Wasn't a Lost Decade for Everyone

Focus: MARKETS

Howard Gold Image Howard Gold Founder & President, GoldenEgg Investing

We've all heard the mantra that this has been a "lost decade" for equities. From 1999 until the end of 2008 stocks did nothing, or even declined, as they did during Japan's infamous "lost decade" of the 1990s.

But is that really true? And does it reflect how people actually invest? 

To find out, I asked The Vanguard Group to study 14 different scenarios in which an individual invested $60,000 in a lump sum or monthly contributions from January 1, 1999 to December 31, 2008. ($60,000 equals $500 a month over ten years.)

We used broad, low-cost Vanguard index funds (and one money market fund) that had been around for the entire decade. We didn't factor in taxes.

In some ways what we found wasn't surprising: If you bought only the Standard & Poor's 500 index on January 1, 1999 and held it until the end of last year, you did badly.

But the broader your stock holdings (small cap, international, etc.) were, the better you did. And besides holding all bonds or all cash, a top performer was a no-brainer 50% stock/50% bond portfolio, with dividends reinvested. Also, lump-sum investing beat dollar-cost averaging handily over this period. (We tested portfolio rebalancing in a limited way and found it added little return.)

My conclusion: Asset allocation is alive and well, and "buy and hold" isn't dead, either—although a growing chorus of people who have a lot to gain from its demise will tell you otherwise. (Next week's column will be devoted to that subject.)

But first, let me walk you through the strategies, starting with the worst. (You can get all the results here.)

chart

Obviously some of the "lost decade" proponents' claims are true: the S&P did terribly during this decade, which spanned the end of the Internet boom, one cyclical bull market, and two nasty bears.

On a pure total-return basis, you would have lost one-quarter of your money by plunking it into the benchmark index and letting it sit.

But by the simple act of reinvesting dividends, you would have reduced your losses by half.