Not Quite to the Nines

Investors tend to justify beliefs by searching out patterns where there are none and assigning meaning to the meaningless.

Story Highlights:

  • Recent stock volatility has many comparing today's markets to the 1970s and the Great Depression.
  • Cumulative stock performance over the past nine years has been below long-term averages.
  • But this analysis assigns undue weight to short, arbitrary intervals and assumes past performance is a good indication of future results.
  • Stock performance over any past time period, no matter the length, provides no guidance as to future stock performance.


It's been a tough few months in the market. Sentiment is decidedly dour—and there are undoubtedly reasons for people to feel gloomy. Housing prices are depressed and subprime's fallout has whacked Financials. It's been a wearying time for stock investors, as the following article confirms.

Stocks Tarnished By 'Lost Decade'
By E.S. Browning, The Wall Street Journal

This article suggests it's not just recent months. In fact, it states over the last decade US stocks have been mired in sludge as bad as the gloomy 1970s, even reminiscent of the Great Depression. The article purports that great share booms like the 1920s, 1960s, and 1990s all produce a decade-long hangover—implying we're currently hung over.

Supporting this argument is an analysis of cumulative stock returns over the last nine years. Why nine? Why not ten? Humans like nice round numbers, right? Well, nine years ago the S&P 500 closed at about the same level it did on Tuesday. And according to the article, over those nine years US stocks have averaged an inflation-adjusted total return of -0.4% a year. That doesn't seem so great. Call it the (almost) decade of drudgery.

Except, if you start picking apart the analysis, you discover it's not quite right, nor in any way useful going forward. The article's analysis is done on a "real," i.e., inflation-adjusted basis. But almost no one tracks inflation-adjusted stock returns. It seems purely arbitrary to do it here, and it deflates actual returns. Plus if you track stocks beginning one year before the second biggest bear market of the 20th century, your average return will look meager for a long time after—even if stocks enter a protracted bull market like the one beginning in 2003. Trust us, if you sat on the sidelines and missed the 93% S&P 500 move since the bottom of the bear in October 2002, you wouldn't call that meager—you'd call that a huge opportunity missed.

Further, why choose this nine-year period? Because index levels are now what they were then? We often make the mistake of assigning significance to meaningless numbers or time periods. While farmers planting crops may base their analysis on how long it takes the moon to circle the earth or the earth to circle the sun—it makes less sense for individuals investing in their 401(k).

Also, nine or ten year periods aren't good examples of long-term returns—especially if you happen to throw a big bear market in the mix. Such short investing time horizons for individuals are quite rare. Most invest with the intention their assets should last their whole life—hopefully much more than ten years. When looking at longer time periods, like 20 and 30 years, even those with dreadful intervals, stocks start hitting their longer-term averages—and almost always beat alternatives to boot.

Additionally, this analysis focuses solely on US stocks. In today's global economy, it's a mistake to have a home-country bias—no matter how big your home country. If you owned a domestic-only portfolio since 1999, you would have missed the performance of foreign developed and emerging markets in the current bull market. Owning a global portfolio noticeably improved average annual returns.

Most importantly, what do the previous nine years tell us about the next nine? Or even the next one? This article seems to imply because stocks' cumulative performance has been less-than-average during a short period including a bad bear market, they must do badly going forward. If investing were about simply choosing the best performing asset class from the previous nine years, this would be a very simple business indeed. Using this strategy, you would invest only in gold, commodities, and REITS today because they've performed well over the last nine years. Or, in 2000, you would have invested solely in US tech companies, just because they had been doing well. Neither is a very good strategy. As we all know, past performance is no indication of future results. There's nothing predictive in this analysis, whatsoever.

Classical music's "curse of the ninth" posits a composer who writes nine symphonies won't live to finish his tenth. Mayan religion holds there are nine gods ruling nine underworlds. And for expanding bar code technology into the home, the InfoPen took the ninth spot in the "Adams Top Ten New Products for ID Expo 1998." This world offers many intriguing numbers to ponder—but when investing, be sure to ponder them fairly and objectively without falling prey to your favorite nine-year interval.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.