It’s a classic setup for discontent. You can’t have a lost decade without a powerful bull market first. During the good times, investor expectations become more and more extreme. But it’s not just the financial sector that feels entitled to a big slice of the pie.
EVERYWHERE you look in a boom, easy money and a forgiving mood paints a golden future. Never mind that it’s mathematically impossible for everyone to get rich. Shining castles of capitalism lure people in by the hundreds of millions.
Imagine their dismay when out of nowhere, gravity arrives to pull it all down, the fat years end and a lost decade begins. As though to atone for the excellent excess, many lean years follow, filled with punishment, regret, and unease.
Lost decades bite
Behind these dismal returns are the millions of investors who sold out in panic, of those who hung on but then gave up hope years after, and those who suffered for their long-term thinking, who stayed in — but invested for nothing.
To the institutional investor, these low returns represent disappointment. Lost decades bestow no awards on money managers. Instead, they set in motion a reversal of fortune for the entire investment industry. This contraction loosens the grip of those who cling to the bandwagons that roll down Wall Street. Off fall economists, lawyers, bankers, accountants, analysts, traders, and brokers — and in turn many of the high-end businesses that serve them.
In the investment industry, the standard advice is not to avoid the stock market, but to think long term, because no matter what crazy stuff happens in the short run, over a long stretch of time, the relentless growth of the economy will put you right. This belief is often cleanly expressed as a number, like eight percent.
It’s a reassuring estimate. Pension plans, actuaries, retirement planners and average investors need to know the expected return for equities so they can calculate how much capital to set aside for the future. Since the long run rate of return is about ten percent, nominally, eight percent sounds conservative enough.
And then along comes a lost decade. For a ten or twenty years, the stock market stays in bed. Encouraged, it might sit up for a while, but then it lies down again. Long term returns are miserable, disappointing. In a few years, the prolonged low returns become a worry. Even optimists begin to wonder, has the stock market stopped working? You said eight percent.
Eight percent is for losers, advisors say, when the market’s done fifteen for the past ten. But give it another ten years more, and eight starts to look good again. And that’s how investors rediscover the market’s limitations. Sometimes you can give it it plenty of time and still make next to nothing.
Lost decade, lost hope
Lost decades aren’t sluggish in isolation. Low returns affect every level of society. The consumer psyche turns away from luxuries and non-essentials. Because sales are down, businesses lay off staff. Businesses also find it hard to raise capital, so they postpone major projects.
Underfunded, the pension industry enters a crisis. Low returns force foundations, endowments and charities to cut their programs back. Cautious lenders stop lending. Even governments feel torn, pulled down by falling tax revenue and pulled apart by demands for aid and action.
In a lost decade, investors worry about losing their money. But if it has been left alone in a diversified portfolio, the money is still there. What’s missing is the money the money would have made, and all it would have paid for: a dignified retirement, first-class education for the family, a chance to quit work and start a business, or care for aging parents.
To the intelligent investor, the greatest loss is twenty or more years of compounding. Part of your precious life that is lost forever. You can’t get it back. Compound return is the eighth wonder of the world only if you have the time it needs to work its magic.
You can be young without money, but you can’t be old without money.
At their worst, lost decades feed one of the great fears of mankind, the fear of growing old, destitute and alone. Wave after wave of destructive energy crush the dreams of an entire generation. Retirement plans fall apart. To cope, the average investor saves more, retires later and lives on a lower income. If only he anticipated — and knew how to handle — a lost decade.
The return of the bull
As it happens, many investors take their money out of the stock market well before the end of the sideways transit, before the next major upmove begins. Worried about becoming poor, they get frightened out. Perhaps they get tired of not making any money, or they resent the sandpapering effect of management fees. Others simply need the cash.
In any case, by the time the lost decade nears its end, an old suspicion seems all too right. Stocks are trouble. For that reason, when the new bull market comes, the average investor is not there. He does not believe in the resurrection, not at first, so he misses the initial advance. A major new upmove starts without him.