How the Lost Decade is a Boon for Your Portfolio

The lost decade has a silver lining: investors who accumulate shares during long market dry spells end up with twice as much money, new research shows.

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Recent evidence suggests that investors are giving up on the stock market. Money is flowing into bonds at a torrid rate, and in surveys since the start of the Great Recession the vast majority say they are committed to being more cautious with their investments.

What a shame. Tough markets are hands-down the best time for long-term investors to accumulate shares—and after the recent decade of no growth for stocks, you can safely call this one of the toughest markets ever. Yet few seem to be taking advantage. Common strategies today call for a 50-50 mix of stocks and bonds; even young people are playing it extraordinarily safe.

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Shunning stocks because they are not rising is sure to backfire in the long run. If you buy now while prices are low you’ll accumulate more shares more quickly. The payoff will come when stocks finally shoot higher, as they always have in the past.

This dynamic is so powerful that you should actually count yourself lucky to be under 40 during a gruesome period for stocks. In a new study, mutual fund company T. Rowe Price found that such markets early in your savings years are about the best thing that can happen to your portfolio.

Researchers looked at four hypothetical investors. Each invested the exact same way, contributing a total of $60,000 in their first decade of saving. But they started at very different times. Two began buying shares near the start of bull markets—in 1950 and 1979. Two began buying shares near the start of bear markets—in 1929 and 1970. For those who started while stocks were dragging, researchers noted:

“Like today’s young investors, they may have felt discouraged after their first decade; the S&P 500 had an annualized total return of -0.9% from 1929 to 1938—the second-worst 10-year period in history—and only 5.9% in the recessionary 1970s.”

With regular contributions and dividends, the bear market investors were ahead after their first decade. But not by much. Their $60,000 had grown to $88,255 the 10 years ending in 1938 and to $86,047 the 10 years ending in 1979. They had every reason to question their commitment to the stock market. But it was a much different experience for those who began investing during bull markets. Researchers noted:

“The S&P 500 returned 19.4% annualized from 1950 to 1959 and 16.3% from 1979 to 1988. Their $60,000 in contributions by the end of those decades grew to $152,359 and $137,370, respectively.”

After their first decade of saving, these young people were on their way and loving life. They were way ahead. Yet they had been accumulating fewer shares because prices were high when they were buying, and they had yet to feel the sting of any significant downturn, which was inevitable and would come after they had a lot of money in the market—not before.

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Remarkably, after a full 30-year investment cycle the “lucky” ones who got off to the fast start had portfolios that were less than half the size as those who got started when stocks were out of favor.

Imagine that. Those who started off with the wind at their backs had accumulated less than $1 million by retirement; those who started buying consistently when the market was scary had accumulated more than $3 million in the case of the 1970s beginner and nearly $2 million in the case of 1930s beginner.

The upshot: The recent lost decade in stocks might be the best thing that ever happened to your portfolio—if you buy consistently and have 30 years to let things play out.

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