I suspect that 10 years ago there were few that would have guessed that the S&P 500 would be underwater 10 years later. After all, on June 30, 2000 the S&P 500 had a 10-year average compound return of 17.8% and it was easy to be optimistic.
S&P 500 Then: As of June 30, 2000
It is much easier to be pessimistic today now that the 10-year average compound return of the S&P 500 is -0.8%.
S&P 500 Now: As of June 30, 2010
Source: The Leuthold Group
I would suggest two takeaways from this comparison:
- There can be wide variability in returns decade-to-decade in the same asset class. One way to deal with this is to adopt a tactical asset allocation strategy that can invest in multiple asset classes and can vary the amount of exposure to each of those asset classes according to their relative strength. This can help mitigate extended periods of underperformance and may enhance your ability to generate superior investment returns over time.
- Performance in a given asset class over the last 10 years doesn’t guarantee returns over the next 10 years. Given the tendency for markets to revert to the mean, it is quite possible that the returns of the S&P 500 over the next 10 years will be very good. Giving up on equities may prove to be a very poor decision over the next decade.
[...] the equity risk premium is sensitive to recent performance, and mean reverting: A recent post at Systematic Relative Strength shows just how different the equity market can look given recent history. They show the flip-flop [...]