Fisher Investments Editorial Staff
Forecasting, Media Hype/Myths

Odds Are

By, 02/26/2009

Story Highlights:

  • US stock indexes fell this week to their lowest levels since 1997, leading to declarations of a "lost decade" of market returns.
  • Comparing today's market levels to a decade ago discounts the entire picture to favor focusing on two pinpoints in time. There have been periods of substantial gains during this time.
  • Measuring today's market level against past levels tells investors nothing about future levels.
  • A long-term view shows equities' historically superior returns include bear markets and periods of extreme volatility.

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Keeping an eye on the future is difficult when others insist on thrusting you backwards. US stock indexes fell this week to their lowest levels since 1997, leading to declarations of a "lost decade" of market returns. Sounds alarming, but such comparisons tell you nothing about the future—in fact, they are misleading.

To presume the last decade's market gains were wiped out is to assume investors bought into the market in 1997 and held those same stocks—no changes—through the period until now. That's rarely the case. The S&P 500 itself hasn't remained static through this period, chucking and adding firms as market values naturally fluctuate. Comparing today's market levels to a decade ago discounts the entire picture to favor focusing on two pinpoints in time. There have been periods of substantial gains during this time—the market hasn't simply moved sideways over the last 10 years. In aggregate, we had seven full years of positive bull market returns during this period. Surely investors wouldn't have been content to stand on the sidelines for seven years of gains.

Ever hear the phrase, past performance is no guarantee of future returns? A decade is a nice round number for investors to digest, but it doesn't take away from its arbitrary insignificance (why 10 years and not 10.8 or 11.2 years?). If the last 10 years were net flat, so what? Does it mean more the same to come? Conversely, if the last 10 years were above average, would everyone laud that the next 10 years must also be above average? No—it's more likely most will insist the market must revert to the mean and the next 10 years would be dreadful. These suppositions are wrong. Measuring today's market level against past levels tells investors nothing about future returns, and markets falling to previous lows doesn't portend poor returns in the future.

Rather than focus on the absolute level of the index today, or where it stands compared to prior levels, investors should focus on their own investment strategies and objectives. For most investors, 10 or 12 years is a timeframe too short to conclude. Even retirees at 65 have typical time horizons of 20-plus more years—some much longer. Markets may be seesawing uncomfortably right now, but a long-term view shows equities' historically superior returns include bear markets and periods of extreme volatility. Even with last year's -37% drop, the annualized S&P 500 return for the last 25 year is 9.4%. Over the past 15 years, the S&P still returned an average around 6% per year.

The odds are in your favor equities will net superior returns over longer time periods. Today's volatility is driving investors into safer asset classes, but history shows investors' surer bet is on stocks outperforming bonds over the next 20 years.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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