A few days ago, one of my readers asked a question. He’s a 31-year old who’s new to investing. “What if the stock market doesn’t make money for a decade?” he asked. “Should I sit on the sidelines, stockpiling cash, and then wait to invest when stocks are cheaper?”
In a recent column, I mentioned a period from 2000-2010. U.S. stocks had jumped up and down. But they didn’t make headway. If somebody had invested $10,000 in the S&P 500, starting January 2000, it would have been worth $9,016 ten years later.
This reader also asked: “How can I protect my money if that happens again?”
For starters, how stocks perform over the next ten years shouldn’t concern this investor. He’s just 31 years old. He has decades ahead of him before he retires. But there’s something else worth knowing. If U.S. stocks slide sideways for a decade, a consistent monthly purchase would buy an ever-increasing share of corporate earnings. Warren Buffett relates this concept to baseball. He says, don’t look at the scoreboard. Look at the play and the players on base.
Imagine playing against a team that leads by two runs. Your team is up to bat. But there’s a twist to the rules. You have two runners on first base, three runners on second base and two runners on third base. So far, your team hasn’t experienced a single out. But the result on the scoreboard looks like your team is losing–if you aren’t looking at the field of play. That’s much like a young investor who fears market declines or a sideways market.
When people invest, they aren’t placing bets on squiggly lines or ticker symbols. Instead, they’re buying shares of corporations. Over time, corporate earnings increase. For example, Coca Cola keeps selling more soda every decade. Johnson & Johnson sells an ever-increasing number of medical instruments, baby shampoos, and almost everything in between. General Electric continues to sell more light bulbs, jet engines, microwaves and washing machines. On aggregate, the S&P 500 companies do much the same. Each decade, their total business earnings rise.
Now assume their share prices remain stagnant for a decade. In that case, somebody investing monthly in the S&P 500 would receive an ever-increasing share of corporate earnings every year. This wouldn’t show up on the scoreboard (their portfolio’s balance). But plenty of runners would be standing on each base.
This is an important concept for investors to understand. When that stagnating market rises (it might take a year, it might take ten) that portfolio will soar as multiple runs are scored.
Now let’s make this real. From January 2000 until December 31, 2009, a $10,000 investment in the S&P 500 would have dropped to $9,016. That’s why it’s called “the lost decade.” But assume a young investor did three simple things:
- He built a diversified low-cost portfolio of index funds.
- He added $500 a month, no matter how the market performed (putting players on bases).
- He rebalanced once a year, back to his portfolio’s original allocation.
Assume his portfolio looked like this:
- 50% U.S. Stock Market Index
- 30% International Stock Market Index
- 20% U.S. Bond Market Index
After the ten-year period ending December 31, 2009, he would have invested a total of $60,000. As shown in the table below, his portfolio scoreboard would have often looked ugly. But if he were patient and just kept adding money, his portfolio would have been fine. After this “lost decade” for U.S. stocks, his portfolio would have been worth $74,472.
If he continued to add $500 a month for eight more years, his players on bases would have scored many runs. He would have added a total of $114,000 between January 2000 and December 31, 2018. And his portfolio would have swelled to $216,258.
Investors shouldn’t try to time the market. Instead, they should add as much money as they can each month. They should also ignore their portfolio scoreboard and stock market news. By doing so, they’ll place multiple players on every base. And when their runs come in, such investors will win.
Endnote: If you’re worried about retiring on the eve of a lost decade or market crash, this story might alleviate your fears.
The Lost Decade Put Players On Bases
|Year||Cumulative Total Added: $500 per month (Players Put On Base)||Year-End Portfolio Balance (The Scoreboard)||Year-By-Year Portfolio Returns (50% U.S. Stocks, 30% International Stocks, 20% Bonds)|
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas