The Wall Street Journal published a front page article this morning entitled Stocks Tarnished By Lost Decade. The article stated that the S&P 500 index is where it was 10 years ago adjusted for inflation. Even including dividends they average return over the last 10 years (ending February, 2008) has only been 1.3%.
There are a few problems with this analysis:
- The S&P 500 is not the Stock Market. It is made up primarily of large US companies it excludes most small and medium sized companies which make up 20-25% of the US stock market valuation
- It only looks at US stocks and ignores international stocks
- It assumes that you invested all of your money up front vs. investing a little over time as most investors in their pre-retirement years do.
- The 10-year time horizon is too short for stock investments.
- They only looked at one 10-year time period vs. multiple 10-year periods.
The Journal admits that other stock classes have significantly outperformed the S&P 500 over the last 10 years although they chose not to include them in their analysis. If they had they may have had to eat their words.
A more diversified stock portfolio made up of 55% S&P 500, 20% Small Cap US Stocks, and 20% International Stocks (90% Developed/ 10% Developing), and 5% Real Estate would have yielded an annual return of 6.12% over the 10-year period or more than double the S&P 500 return of 2.46% (neither return is adjusted for dividends or inflation).
The Wall Street Journal has a point that after a great run in the 90s large-cap US stocks have not done as well this decade. They have missed out on the fact that The Stock Market is a lot more than large-cap US Stocks. I hope you don’t make the same mistake.