After Equities' Worst Decade Ever, the 2010s Gotta Get Better, Right?

A look back at the last decade shows that not even the Great Depression was so unkind to stocks. That's right: The 2000s are going down as The Worst Decade Ever when it comes to U.S. equity performance.If you can bear it (no pun intended), pull up a 10-year chart of the S&P 500 ($INX). It's off more than 25% on a price basis. %%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Reinvest the dividends, factor in inflation and you get an annualized "return" of -3.3%, according to Charles Jones, a finance professor at North Carolina State University. Not since the 1970s have equities fared so poorly. Heck, even the dismal 1930s managed to eke out an annualized gain.

Recall that historically U.S. stocks have returned about 10% a year before inflation. That's why they're the cornerstone of our retirement plans: No other asset class can compete with that kind of long-term performance. But after such a lousy, lost decade for equity investors, will the next 10 years bring more of the same?

Equity-Like Behavior Ahead?

Happily, there have never been two consecutive calendar decades in which U.S. stocks produced negative returns, says Brett D'Arcy, chief investment officer at CBIZ Wealth Management (CBIZ). Maybe it's just regression to the mean, but D'Arcy sees equities producing (gasp!) equity-like returns over the next decade -- just like they're supposed to.

"We expect the stock market to get back to that 10% to 11% annualized range for the next 10 years," D'Arcy says. "We have a tremendous amount of money out there flowing into the market, so we should start off the decade pretty quickly. And valuations are pretty reasonable given where we are in the recovery."

One of D'Arcy's favorite themes for the next 10 years is health care, thanks to America's aging population. "Demographically, the baby boomers, everything they touch it's like a pig through a python," D'Arcy says. "Affluent baby boomers are going to demand quality health care and drug development."

Money manager John Hussman, whose Hussman Strategic Growth (HSGFX) and Hussman Strategic Total Return (HSTRX) funds delivered market-beating annualized returns of 8.6% and 7.9%, respectively, since their 2000 and 2002 debuts, is less sanguine than D'Arcy. As we noted recently, Hussman thinks stocks are priced to disappoint for a decade with an annualized return of 6.1%. True, that's far better than the losses suffered in the aughts, but it's still well below what equity investors have come to expect, especially considering the risks they take in buying stocks.

Look Overseas, but Carefully

Then there's the argument that you'll need a bigger allocation to international stocks in order to get historically acceptable equity returns. The U.S. and developed world in general is littered with weak banks, high levels of debt, anemic growth, low interest rates and an aging population, says Robert Jergovic, chief investment officer at CLS Investments.

"But if you look at the emerging world, you not only have cash and growth, but also better demographics and improved savings," Jergovic says. "If those countries are starting to invest in infrastructure, capital spending, that's a formula for making money longer term."

It's not like emerging markets are a secret, and Jergovic still advocates keeping most of your portfolio closer to home. His baseline equity allocation is 80% domestic and 20% international, with half of the foreign pie placed in developing markets. These days he's closer to 70% U.S. and 30% foreign (overweighted to emerging markets), but he still recommends being selective in your bets. "I don't think you buy the emerging market ETF and just forget about it for 10 years," says Jergovic. "There are always ups and downs."

Real-Time Reallocations

Speaking of ups and downs, regardless of what the market does over the next decade, investors can best be prepared through a truly honest assessment of risk tolerance, something that will go high-tech this decade, says Neal Ringquist, chief operating officer of Advisor Software. " A successful investing strategy still starts with getting your asset allocation right," Ringquist says. "Most of those who got hammered close to retirement in 2008, 2009 had their asset allocation wrong. The key is to have the proper allocation and diversification."

Since every financial transaction leaves an electronic breadcrumb trail, technology will allow for greater personalization and, let's face it, greater honesty. Sitting down with an adviser and discussing your goals is one thing, but using actual, real-time financial data often presents a very different picture. "The key is to let your household balance sheet dictate your investing approach rather than a personal, psychological profile," says Ringquist.

After all, everyone wants huge returns with no risk, but investing doesn't work that way. After a lost decade that saw two massive bubbles destroy so much wealth, anything that protects us from our own worst investing impulses -- namely fear and greed -- will be a welcome development, indeed. Equity investors can't afford another decade like the last one.

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