The Lost Decade?

This entry is part of a monthly finance blog I will be writing for Access Tallahassee (a division of the Greater Tallahassee Chamber of Commerce).  You can view the post on their website, alongside other blogs from the region's young professionals.

Historically, stocks have made for great long term investments.  After the financial collapse of 2008, however, many market analysts stopped to reflect on traditional investment approaches.  Stocks had seen two dramatic crashes in under 10 years.  Even today, stocks values are about 20% below their peak in March of 2000.  In Fact, the tech heavy NASDAQ composite is nearly 50% below its all time high.

It is rare to find stocks cheaper than they were 10 years ago, but here we are, looking back on what many have dubbed a “Lost Decade.”

But was the decade really lost to investors?  If you took all your money and put it into the market at its peak, there is no doubt that you have lost out, but that’s not how investors typically invest.

The average investor invests via “Dollar Cost Averaging.”  Dollar cost averaging is a fancy way of saying you put a little money aside periodically, whether it be each month, paycheck, etc.  The draw of dollar cost averaging is that it is simple, intuitive and doesn’t require much thought or worry.  Even better, over time, an investor that simply follows this strategy tends to do just as well as the average professional investor.

So how has that strategy worked out during the “lost decade?”  Let’s assume that you started investing back in 2000, and continued to invest some fixed sum each month.  You didn’t invest in anything fancy – just put your money in a diversified index fund that tracks the market.  You didn’t get overly optimistic in good times, and you didn’t panic in bad times.  Just steady, boring investing.

Such an account would currently be up over 20%.  That’s right, by following the most laid back, plain vanilla investment approach, the average investor could have grown their investments by 20%.  Certainly, this is not impressive in terms of historical market returns, but it far outpaces the dire picture painted by most headlines over the past three years.  Most importantly, despite the market being down 20%, this common sense investment approach has investors ahead, meaning for many investors, the decade was not lost after all.

The message? Even in the worst of times, well informed, common sense investment approaches can still help investors grow their assets.  It can be done without “hot” investments like gold or other commodities or paying high management fees for expert advice.  Being armed with a level head can even help individual investors outperform many professionals over time.