A Better Decade for Your Portfolio?


There’s an old saying: Don’t wish your life away. It’s the kind of thing a parent says to a child who wishes good things like Christmas would come faster.

But investors can be excused for looking forward to the end of a decade that hasn’t served them very well. The average stock has lost money over the past 10 years, thanks to the dot-com collapse early in the decade and the financial crisis of the past few years.

There may be a silver lining, though. After a bad decade, stocks tend to do exceedingly well in the next decade, according to an analysis by Madison Investment Advisors of Wisconsin.

Madison looked at 11 10-year periods when the Standard & Poor’s 500 produced sub-par results — returns averaging less than 6% a year. The most recent 10-year period with complete results, 1999 through 2008, was worse than the 11 studied, with average annual returns of negative 1.38%.

Of course, it’s way too soon to know how the subsequent 10 years will be. Will hammed-down firms like Ford (Stock Quote: F) recover? Will big winners of the past like Google (Stock Quote: GOOG) and Berkshire Hathaway (Stock Quote: BRK.A) be stars again? We’ll have to stay tuned to find out.

But previous results are encouraging. On average, the substandard decades produced gains of just 2.52% a year. But the average decade that followed saw average annual returns of 13.4%. Gains averaged 14.82% in the 20 years following each bad decade.

Even more encouraging, the rebound decades have generally been doing better and better, and in a number of cases the rebound was especially strong after decades that were especially bad.

The smallest rebound came in the 10 years beginning in 1936, when annual returns averaged 8.42%. The 1926-1935 period saw annual gains just barely bad enough to make the list, averaging 5.86% a year.

Only four of the 11 rebound periods had annual returns that failed to break into double digits, and all four of those ended before 1940. They were 10-year periods beginning in 1926, 1928, 1929 and 1930 — all obviously dominated by the Great Depression.

Not surprisingly, the boom years following the Depression and World War II saw the biggest rebound ever. Stocks gained 18.43% a year for the decade starting in 1947, after earning just 4.41% a year in the 1937-1946 period.

What will happen after the worst decade since the 1930s? Obviously, no one knows for sure, but the S&P 500 is up about 26% since the start of 2009, after losing 1.38% a year from 1999-2008. It’s up more than 60% since hitting it’s most recent low in March.

Investors, it seems, are rarely satisfied with returns on “safer” holdings like cash and bonds. When stocks emerge from a slump, often when the economy shakes off the doldrums, investors are eager to pile in, bidding stock prices up.

Since no one knows when a rebound will begin, it’s best to settle on an asset allocation strategy and stick with it through thick and thin.

The 1999-2008 period shook many investors’ confidence in stocks, and has caused many to shift money from stocks to bonds this year. But the historical record shows that stocks do recover from bad periods and go on to trounce the alternatives.

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