Investment Lessons of the Last Two Decades

As we end the decade on a high note for the markets, it is worth reflecting on the past 20 years and how we got here. 

When we started the past decade during a recession, it was hard to think that we would have a bull market for the next ten years and one of the longest economic expansions in history. From 2010-2019, stocks generated returns above long-term averages although it wasn’t the best decade we’ve experienced. As you can see below, the S&P 500 generated higher returns in the 1950’s, 1980’s and 1990’s. It was, however, a welcome reprieve from the “lost decade” of 2000-2009 when the average return for U.S. stocks was negative.

Source: Dimensional Fund Advisors

As we look forward to the 2020’s, it is worth thinking about conditions at the beginning of these prior two decades and how they may have impacted the markets over the succeeding 10-year periods.


Market Conditions

*2019 GDP is based on the December 2019 estimate from the U.S. Federal Open Market Committee; inflation rate for 2019 is based on November 2019 data; U of M Consumer Confidence data for 2019 is from November 2019 
Sources: Federal Reserve Bank of St. Louis, Robert Shiller, Dimensional Fund Advisors
  • At the end of 1999, technology companies were flying high, the economy was showing strong growth and valuations were high. The stock market had generated incredible returns over the previous 10 years and technology was changing the way we do business and live. However, it turned out that valuations were extended and that many of these technology companies would not live up to their expectations. With these factors and the financial crisis in 2008, returns over the 10 years from 2000-2009 would be negative for U.S. large cap stocks.
  • On the other hand, at the end of 2009, the economy was in a recession and the stocks had just experienced a severe bear market. Consumer confidence was low, as were stock valuations. This, however, ended up being a great time to invest. Over the next ten years, the S&P 500 returned over 13% per year on average as falling bond yields, accommodative monetary policy and steady economic growth helped drive markets higher.

It is easy to extrapolate what has happened recently and expect it to continue. However, in both of those decades (2000-2009, 2010-2019) the opposite was true. This shows up not only in overall stock market performance but also in the performance of various asset classes and sectors. In the decade 2000-2009, stocks underperformed bonds, small cap stocks outperformed large cap stocks, U.S. value stocks outperformed U.S. growth stocks, and U.S. stocks underperformed international stocks. In the decade 2010-2019, all of these trends flipped.

Asset Class Performance over Last Two Decades

Source: Dimensional Fund Advisors.
Notes: Representative indexes are: Stocks – S&P 500, Bonds – Bloomberg Barclays U.S. Government/Credit Bond Index Intermediate, Large Cap – S&P 500 Index, Small Cap – Russell 2000 Index, Growth Stocks – Russell 3000 Growth Index, Value Stocks -Russell 3000 Value Index, U.S. Stocks – S&P 500 Index, International Stocks – MSCI All Country World ex USA Index (net div.).


Our first takeaway is how difficult it can be to make predictions as to where the market is going. It is difficult to know when a trend is going to change directions and how the market may react. As we look at the market today, stock market valuations are above long-term averages while bond yields are lower than they have been historically. These considerations would point towards a tougher return environment over the next 10 years. However, we know there are a wide range of possibilities over the next 10 years, and we design our portfolios accordingly.

Our second takeaway is the importance of diversification. As we saw in the last two decades, what performs well for one ten-year period may not perform as well over the subsequent ten years. Owning a diversified portfolio can balance out the ups-and-downs of different asset classes. Along with being diversified it is important to match your portfolio with the goals you are trying to achieve and your risk tolerance. 

If you have questions about your portfolio and if it is constructed properly based on your financial goals, schedule a call today.

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