I think we are getting our definition of "lost decade" confused. By "lost decade" I'm implying that it was a decade where there "zero economic gains" for the typical S&P 500 investor from the start of the decade (the first spike) until the end of the decade (the second spike). A few years within that decade where phenomenal, but overall it was a wash. Yes, there was a lot of volatility within that decade, and yes the S&P 500 index rose back,after a few big dumps, back to that irrational spike at the beginning of the decade. I can see your point of view where the decade was not lost because the S&P 500 Index did rise during that decade back up where to where it started. What I was implying by my original post was that you would have made gains during that decade by diversifying and you would have had more money at the end of the decade than you had at the beginning, those two irrational spikes you speak of. The end of the decade spike would have been higher, with a diversified portfolio, than the start of the decade spike. I'm sure they are many other time spans where the S&P 500 index outperformed a diversified portfolio and vise versa. Sorry I called your Captain Obvious by the way, sometimes I lose my cool a bit when posting on these sites.
Here’s why calling it a “lost decade” is incorrect, particularly if the claim is that there were “zero economic gains for the typical SP500 investor”. As you noted there was a lot of volatility, and if you measured the value from point-to-point the market wound up essentially flat. But that doesn’t mean that it was a bad period for SP500 investors, nor is that method indicative of how most people invest.
Indeed, if you had $10k in an SP500 fund in 2000 and walked away for a decade you would see no growth (in fact it would be slightly down in real terms). Fair enough. But assume that an investor started contributing $1k monthly during that same time frame and s/he would have posted meager inflation-adjusted gains during that time period. Which still would have been horrible, unfortunate timing on the investors part.
STep back a bit further, and look at a hypothetical investor who had begun to invest in the early 90s and the annualized real returns start mirroring the historical average
even though more than half of all contributions occurred during your so-called ‘lost-decade’. To further illustrate the point - consider what happens if we shift the time period just two years. 80% of this “lost decade” remains, yet the real returns jump by 28% for that decade. Shows what looking at very specific time periods can do.
Your proposed solution - increased diversification - is not a bad one. In full disclosure, I also own small cap and international index funds. But your suggestion that this would avoid the flat performance is highly dependent on what those holdings are. Certainly bonds would have helped, with annualized returns above 3% for US treasuries. Small Caps did better, but just barely, at 1.4%. But many international indices got hammered, as the ‘Great REcession’ impacted some countries (e.g. Western Europe & the Middle East) far more than in the US. So depending on what an investors AA was, s/he could have done slightly better or even worse than simply holding the SP500. We certainly could cherry-pick which AA would have done well during this specific period, but that would be
ex post facto. We already know that a high-ish (>20%) of bonds will tamp down volatility in a portfolio, but that it will miss out on n equities-only portfolio in the overwhelming majority of 10, 20 and 30 year periods. Ironically most international funds introduce more volatility than the SP500, compounding the problem they’re supposed to solve. So while I agree with your general statement about increasing ones diversification
to a point, its unclear what that point is and unclear whether that would have fared any better.
