How to Invest During a Lost Decade
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Billionaire investor Stanley Druckenmiller recently warned that there is a high probability the stock market will be flat for an entire decade. In other words, he's suggesting that we should expect 0% returns from stocks before inflation has even factored in for the next 10 years.

The technical term for an event like this is lost decade. Stanley is predicting that the next 10 years will be a lost decade. And while his strong negative feelings about the stock market aren't anything new, his recent statement has made major news headlines and in turn has created even more concern for investors who are already on edge. So what exactly does a lost decade mean for retirement investors? How likely is it that we're going to experience one?

And if we do, how should investors think about their asset allocation going forward? This is the Stay Wealthy Retirement Podcast. I'm your host, Taylor Schulte. And today I'll be answering those exact questions. To grab the links and resources mentioned in today's episode, just head over to youstaywealthy.com forward slash one seven zero.

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Okay, let's get into today's topic, lost decades in the stock market. As mentioned, the latest prediction making headlines is that the US stock market is headed towards 10 years of potentially flat returns, i.e. a lost decade, which is the last thing that everyone needs after a global pandemic, 40-year record high inflation, double-digit losses from stocks and bonds, 7.5% mortgage rates, and a looming downturn in housing prices.

But how many times have we experienced a lost decade here in the United States? Believe it or not, it's only happened twice. The first time was in the 1930s, and it was, of course, a result of the Great Depression. During this time, from January 1st, 1930 to December 31st, 1939, the S&P 500 returned a negative half of a percent, negative 0.5%.

The second lost decade was from 2000 to 2009, and it was a result of the tech bubble bursting coupled with the Great Recession. And during that 10-year time span, the S&P 500 lost about 9% in total, negative 9% total return over that 10-year time period.

Now, if we want to include inflation and its impact on investment returns, we could also consider the 1970s to be a lost decade. As mentioned in last week's episode, the 1970s did deliver healthy returns to investors, close to about 6% per year on average, but record high inflation rates ate up all of these returns.

This resulted in a 10-year period of negative returns for U.S. stocks when adjusted for inflation. We call these real returns. Real returns are net of inflation. So we'll be generous and we'll say that we've experienced three lost decades over the last 100 years. In other words, lost decades are extremely rare. And while all three of these rare catastrophic time periods were very, very different, they all had one thing in common. And

And that is that investors with diversified portfolios who didn't invest 100% of their portfolio in broad-based US stocks

ended all three of these 10-year lost decades in positive territory. Yes, even after inflation. I'll say that again. Investors with diversified portfolios who didn't put all their money in U.S. stocks ended all three 10-year lost decades in positive territory, even after inflation. Let me break it down for you using historical data that I gathered from both YCharts and another analytic software called ReturnsWeb.

I'll be sure to include links to the results in the show notes if you want to dig deeper, but it's important for me to note here that I'm using indexes doing this research, some of which were created just for historical research purposes and were not directly investable during all time periods.

So since they're indexes and not publicly traded funds, they don't include fees like trading costs, expense ratios, capital gains distributions, advisor fees, et cetera. And therefore the returns stated are going to be higher than what an actual investor would have been able to record in real life. Nonetheless, it's all that we have to work with when doing this type of historical research. So you'll have to accept that perfect is the enemy of good here.

Lastly, before we start talking about percentages and numbers, just a reminder that this podcast is for informational purposes only and past performance is of course, no guarantee of future results. Okay. With all that out of the way, let's start with the 1930s.

As I mentioned, from January 1st, 1930 to December 31st, 1939, the S&P 500 had a total negative return of about 0.5%, negative 0.5% over that 10-year time period. Intermediate five-year U.S. Treasury bonds, on the other hand, returned a positive 56% during the same time period.

This was the 1930s and access to investments was quite limited. So we'll keep it simple and not introduce any other indexes for this time period. But if an investor did take a diversified approach and had a basic portfolio comprised of 60% U.S. stocks and 40% five-year government bonds,

They're totally hypothetical. 10 year return during the worst period in economic history was a positive 40%. This translates to about 3.4% per year on average. So nothing to write home about, but certainly better than a negative or flat return for an entire decade.

Moving on to the 1970s, once again, from January 1st, 1970 to December 31st, 1979, the S&P 500 had a total positive return of about 76% or about 6% per year on average. Like I said, healthy returns, but inflation averaged around 7% during that time period. So net of inflation, investors' real returns were negative for the entire decade.

And while nobody wants a repeat of the 1970s, it's important to acknowledge that like the Great Depression, diversified investors were rewarded.

During this 10-year time period, small cap value stocks, as represented by the dimensional US small cap value index, small cap value stocks returned a positive 275%. International stocks represented by the MSCI IFA index, which we've used here on the podcast before, international stocks returned a positive 161%. And boring five-year US treasury bonds returned a total of 96%.

So let's say that instead of putting all of my money in a US large cap stock index like the S&P 500, I invested in a balanced 60% stock, 40% bond portfolio, a portfolio that had 20% allocated to the S&P 500, 20% to small cap value stocks, 20% international, and 40% to boring plain vanilla US treasury bonds.

This hypothetical balanced portfolio, globally diversified portfolio had a hypothetical 10 year return of about 146% or about nine and a half percent per year on average, which means that adjusted for inflation, a diversified investor, a globally diversified investor did have a portfolio that returned that had positive returns above inflation.

Lastly, let's talk about the most recent flat decade, the 2000s. This was from January 1st, 2000 to December 31st, 2009.

During this 10-year time period, the stock market was cut in half twice. Just let that sink in. During what I would call a relatively short investing time period, 10 years, an investor investing in U.S. stocks experienced two 50-plus percent drawdowns. One of these occurred when the tech bubble bursted in the early 2000s, and the other was a result of the 08-09 financial crisis.

It was a challenging decade to say the least, and it was clearly reflected in the negative 9% total return for the S&P 500 during that time.

Keep in mind here that negative 9% total return for 10 years, assume that dividends were being reinvested the entire time. If you were spending those dividends instead and not reinvesting them, your return for those 10 years was a negative 24%, almost three times as worse. But if

But if instead of chasing and spending dividends, an investor had a nice globally diversified portfolio, their hypothetical returns for this terrible 10 year time period was about 68% or about 5.3% per year on average.

And just like the 1970s scenario, this analysis assumed 20% invested in the S&P 500, 20% in small cap value stocks, 20% international, and 40% in intermediate U.S. treasury bonds represented by the Bloomberg Intermediate U.S. Treasury Bond Index.

Once again, diversified portfolios, globally diversified portfolios ended one of the most difficult 10 year time periods in positive territory. Now, before you race to send me all the reasons why these hypothetical returns are not realistic, I want to acknowledge again that yes, these returns are based on indexes and are not exactly indicative of what an investor might have experienced by investing in publicly traded funds.

Throughout the 1900s, investment options were limited. The process to invest was full of friction and it was expensive.

But let's not forget that Vanguard was founded in 1975 and quickly began bringing low-cost, diversified investment options to retail investors. By the year 2000, investors had a wide range of low-cost providers to choose from, and perhaps the only thing working against them was the lack of investor education and an environment ripe with conflicts of interest. So while many investors did get sucked into high-flying tech and growth stocks and day trading and making a quick buck...

I don't know if that sounds familiar to anyone. I'd argue that they did have access to all of the right tools to not just survive, but potentially thrive during one of the most difficult 10 years in stock market history. But pushing all that aside, my goal with today's episode was simply to reinforce something that I shared last week, which was that while these extreme catastrophic events are always different, the reward for smart, diversified, long-term investors has always been the same.

Maybe a diversified investor's actual total return net of fees during the 2000s was, I don't know, 28% instead of 68%, like the back-tested index data. Whatever it might've been exactly, I would still argue that a smart diversified investor still likely had a better outcome than the negative 9% total return that always seems to make headlines when discussing lost decades.

So when you see a headline predicting a 10 year period of flat returns or the possibility of a lost decade, please open up the article, read the fine print, take note that they are most likely referring to a prediction about one single broad based asset class, and then remind yourself that you don't or you should not put all of your eggs in one basket.

that you have or should have a prudent, diversified portfolio that matches your unique goals, risk tolerance, and risk capacity. Sure, the next 10 years could very well be full of challenges, downturns, out-of-control inflation, and maybe even negative real returns for large-cap U.S. stocks.

I truly don't know. And neither does anyone else. But historically during extremely challenging time periods, diversified investors who stayed the course reinvested their dividends and remained focused on the things that they could control had a much better experience than the hypothetical investor who put all of their money in a single asset class like the S and P 500 for an entire decade.

So with all of that in mind, let's answer the three big questions that I posed at the top of today's show. Number one, what exactly does a lost decade mean for retirement investors? Well, it means that we have to be very thoughtful about the construction of our portfolios. It also means that we might need to expect lower rates of return for an extended period of time and continue to stress our retirement plans to ensure that they can weather future storms. A

A headline suggesting that a lost decade is ahead does not mean that globally diversified investors will experience a decade of negative returns. It also doesn't mean that we should stuff all of our money under the mattress or chase investments that sound too good to be true or trash the plan that we worked so hard to put into place. Remember, read through the headlines and remind yourself that they're likely referring to a single prediction about a single asset class.

And then remind yourself that you hopefully that you don't just own one single asset class and that you've worked really hard to diversify your hard earned dollars and invest prudently.

Number two, how likely is it that we're going to experience a lost decade? Very likely. No, I'm just kidding. Well, considering that the U S has only had two lost decades in all of history, the odds are quite low. That doesn't mean that it's not possible and that we shouldn't be prepared for worst case scenarios, but it's a low probability event. And it's an even lower probability event for globally diversified investors.

All we can do is make educated and informed decisions with the information that we have access to. We can't predict the future and we shouldn't turn our long-term retirement plans upside down just because someone thinks they can. We have to stay focused on the things we can control, one of which is to plan and prepare for catastrophic events from time to time because they do happen.

Number three, if we do experience a lost decade, how should investors think about their asset allocation going forward?

I've already touched on this, but I think one action item to consider coming out of today's episode is to revisit my investing in retirement series. And I'll add it to the show notes to revisit this series where I break down how to think about constructing a portfolio and investing in different asset classes. Lost decade or not, diversification is wildly important to any long-term investor. It's also wildly misunderstood. So

So now is as good of time as any to ensure that you're properly diversified and that your investments, i.e. your prescription, truly matches your retirement plan, i.e. your diagnosis. Once again, just like last week, I'm not discounting the severity of the current environment. We are faced with some serious challenges at the moment, and things could certainly get worse before they get better.

I'm also not suggesting that we just ignore current events and buy and hold and it'll all go away eventually. I'm just simply trying to provide some perspective to broad-based statements and headlines that can be misunderstood, they can be scary, and they can lead investors to make harmful, sometimes irrecoverable decisions with their money.

I love this topic and I'm open to going deeper on it in a future episode. So please don't hesitate to send over any questions, comments, or ways that you might consider approaching a decade of low or negative returns. As always, you can email me at podcast at you stay wealthy.com. You can also grab the links and resources mentioned in today's episode by going to you stay wealthy.com forward slash one seven zero.

Thank you as always for listening, and I'll see you back here next week.