The S&P 500 opened for business on Jan 3, 2000 (the first trading day of the year) at 1469.25. It closed yesterday at 1390.71.

According to an interesting article by Randy Forsyth at Barron’s if you add the dividends in it would be break even. I’m not sure if that is exactly right but you get the idea. I’ve referred to this as a big round trip to nowhere.

Most of the article focuses on thoughts from Robert Arnott in which he reasonably concludes that double digit expectation are too high and that investors should plan on average annual returns of 6-7%.

If you’ve been reading this site for a while you know I generally agree with that conclusion and actually have been writing about this for a while but I think the article misses a crucial point which I tried to capture in the above chart with the spray can feature (which I probably won’t use again) of the Paint program.

Going back to the numbers in the first paragraph and forgetting the dividends the S&P 500 is down 5.39% this decade. However if an investor had the misfortune of getting scared out on December 31 2002 and got back in one year later they would be down 25.13% decade to date.

The average annual decline per year this decade has been 0.67% but for anyone missing the best year of the decade the average annual decline jumps to 3.14%. I think this supports something I have touched on before about the risk taken in getting completely out of equities when things look bad.

If instead of being completely out an investor was simply a little defensive and instead of being up 26% with the SPX in 2003 they lagged and were only up 20% that year then decade to date they might be down 11.5% which still fits the definition of lost decade but I don’t think is anywhere near as bad as being down 25%.

I’ve been bearish for ages but have also been plenty long, had a little more cash than normal and been hedged a little thus the risk has been lagging up a lot as opposed to missing it altogether which I think the above numbers show can be a huge game changer.

If you look at most decades I think you will see that most of the return comes from two or three very good years (the 1990s as an obvious exception) and missing them will blow you up. You might be able to make your plan work with 6% average annual returns but you gotta be there to get it.

Last 5 posts by Roger Nusbaum

• The Big Picture for the Week of November 15, 2009 - November 14th, 2009
• Process Drilldown - October 23rd, 2009
• Sunday Morning Coffee 10-18-09 - October 18th, 2009
• A Little Followup From This Morning - October 8th, 2009
• Wednesday Roundup - October 7th, 2009