That was the headline in a Wednesday, March 26th Wall Street Journal, article by E.S. Browning. The article made the following additional claims:
“The Stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.”
“…the S&P 500 has risen an average of just 1.3% a year over the past 10 years,…it has fallen 0.37% a year [for the past nine years] and for the past eight, it is off 1.4% a year.”
In reading this, I could not help but get a little angry, for two reasons. First, the information is plain wrong, or very misleading at best. Second, once again the media’s failure to report the whole story is letting the money management world off the hook. Let me address these issues one at a time.
First, the comment in the title; “U.S. Shares” and is measured by the S&P 500 Index. That is 500 of over 5000 stocks. Plus, the index is market cap weighted, meaning the largest 50 companies in the index really dominate the returns reported by the index. Don’t get me wrong, the S&P 500 Index can be a good proxy for US Large Cap Growth stocks. But to suggest it represents the US stock market is just plain wrong!
The following are the returns of the other 3 major stock market asset classes, as reported by the Russell Indexes and the DFA Index funds. I show the DFA index funds since they more truly represent the academic research behind these asset classes. Also, the DFA funds actually represent the returns an investor could have earned, net of all trading costs and fees.
| Asset Class/Index | 8 Years | 9 Years | 10 Years |
| U.S. Large Cap Value | |||
| Russell 3000 Value Index | 7.38% | 6.26% | 6.29% |
| DFA US Large Value Fund | 10.34% | 7.77% | 7.07% |
| U.S. Small Cap | |||
| Russell 2000 Index | 3.46% | 7.76% | 4.34% |
| DFA Small Cap Fund | 5.59% | 10.37% | 7.24% |
| U.S. Small Cap Value | |||
| Russell 2000 Value Index | 10.98% | 11.07% | 7.73% |
| DFA Small Cap Value Fund | 11.80% | 13.84% | 10.07% |
While the article talks about US stocks, any good portfolio of stocks would also have international companies. Over the same period of time, international securities did better than the US stock market. One example is the Non-US Small Cap Value asset class as represented by the DFA International Small Cap Value Fund with annual 8, 9 and 10 year returns ending February 2008 of 17.17%, 17.30% and 13.76% respectively.
I will agree that the past 10 years of US Large Cap Growth stock returns have been bad. That is not the story of the rest of the over 4500 stocks in the US or all the stocks traded in the rest of the developed world.
My second problem with the article has to do with the expectations it helps set for investors. By suggesting that the S&P 500 is the market, then it sets a very low bar for performance measurements for the money management world. The simple fact that the majority of active managers fail to beat the S&P 500 Index is bad enough for investors. Even worse is that money mangers are getting away with being compared to such an easy benchmark to beat, but yet they still fail.
In the last major bear market of 2000 through 2002, the S&P 500 Index was off almost 45% at one point. It is that period that causes the bad return numbers for the index in the 8, 9 and 10 years referenced in the article. What few people talked about back then, and what this article fails to discuss, is that other asset classes did not do that poorly.
Over the 2000 through 2002 period, a well diversified stock portfolio should not have been off more that 10% total. Not a year, but for the entire period. Then it would have been up over 30% in 2003, more than gaining for the losses. Did investors actually earn these types of returns . . . Ours did! Most of the market did not. And since the press failed to point out the better returns of the other asset classes, investors did not realize that they did not have to loose 1/3rd of their net worth.
Diversification means more than owning 100 different stocks. It means owning many different stocks, in many different asset classes. This concept is nothing new.
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