Many Americans experienced significant financial losses from 2000 to 2010, commonly known as the ‘Lost Decade’. Although financial professionals urge clients to buy low and sell high, panic often leads to emotional investment decisions. In this episode of Money Script Monday, Brian presents a strategy that captures stock market gains and reduces losses regardless of the economic climate.

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Video transcription

Hi, welcome to another episode of Money Script Monday. My name is Brian Manderscheid.

Today, I want to talk to you about how to prepare yourself for the next lost decade.

Now, before I begin, I do want to reiterate that there's no way we can be for sure about what the next 10 or 20 years of the stock market will look like, whether we have a bull or bear market.

We can look at the data, which is what I want to do today, see if you can make any sense out of it, to make some practical decisions moving forward.

I also want to introduce a strategy called indexing that will allow you to capture gains in the stock market up to a limiting factor like a cap rate while eliminating all downtime loss.

This strategy will work, in not only bear markets but also bull markets, and I want to prove it to you with the data.

S&P 500 Total Return

Let's get into the math here.

What I did is, using one of our financial planning softwares, I pulled the last 20 years of the S&P 500, including dividends, which is the S&P Total Return.

I want to break it down between the 2000s, the 2010s and then pull it all together.

First, if we look at the S&P 500 again, including dividends over the 2000-2009, we refer to that as the lost decade. Why do we refer to it that way?

These losses, that tech bubble burst, -9%, -12%, -22%, only to have a brief recovery, only to have another major stock market loss in 2008 with the Great Recession.

Now, if you invested $100 in the S&P 500, including dividends, you'd see your $100 eventually gets down to $62, climbs its backway up to past $100 over 6-7 years, to only end up at $91 at the end of that 10-year time frame.

That's really why it's called the lost decade is you actually lost money over that 10-year time frame.

One thing to point out is whether you're investing $100, $1000, $1,000,000, this concept's the same. We're just scaling it down to $100 just to make sense out of the data.

We're also now assuming any taxes, fees that you may incur while investing or any emotional decisions that you may have made over that 10-year time frame.

Many people don't buy low and sell high.

They make emotional decisions with their money. They panic and then get out at the wrong time and end up missing their recovery.

Last 20 Years of the S&P 500

To get more into the lost decade, the average return was 1.21%, a positive rate return. However, the actual return was just about -1%. Why the difference?

Well, if you look at a mutual fund statement, you're just looking at the average, which is taking the annual returns and dividing it by the number of years.

The actual return looks at the growth of your money. So for example, let's say you were investing in a hypothetical investment and it went down -30 or 1 and +30 or 2.

The average return over that time frame is 0. However, if we look at the math, your $100 goes down to $70, which is -30, and then up to $91, which is +30.

Your actual return is -9 even though your average was 0.

It's important to look at, not the average return of your money but the actual return on what you're earning in your investments.

Obviously, the lost decade was pretty painful for anyone who experienced that and we had a really good recovery over the last 10 years.

And it's hard for us to go back in time and remember the panic that we went through over that 10 years and how emotionally taxing that was.

Now, over the recovery period, your $91 at the end of the 2000s actually grew to $324, again, not taking into consideration the taxes or any expenses that you may have had.

Very strong gains, 15%, 16, 31, 22, +31, only one year was a negative return, negative for a year, and a few flat years that were saved by the dividends, so really a good time to be investing in the stock market.

Now, look at the average returns, a 14.15%, the actual return still really good at 13.5%.

Just looking at that decade, if you invested $100 at the start of 2010, at the end of 2019, you'd have had $357. So just looking at that time frame, it was great.

But that was the recovery period after two major market collapses that we had a decade before.

If we tie the whole 20 years together, you can see that the average return from 2000 to 2019 was 7.68. The actual return was 6%.

That was a gross return, you have to net down fees and taxes to get your net return and the growth of $100 at the start of 2000s would $324 at the end of the time frame.

Overall, you could see, not bad, but let's see if we can improve it using a concept called indexing.

You probably saw some numbers here on the other side of the board where we're able to get 0% rate of return when the stock market goes down but we can receive positive rates return when the stock market rebounds.

This is a strategy called indexing. It's only available through insurance companies.

And it can be added on to life insurance. It can be added on to annuities. Something to point out is that you don't actually own any individual stocks.

You don't own any equity investments.

Instead, the insurance company uses the index like the S&P 500 as a measuring stick in order to credit you returns when the stock market rebounds.

The S&P indexing strategy also doesn't take into consideration dividends because again, you don't actually own any stocks.

Let's go through both the 2000s and 2010s. You can see your $100 maintained at a $100 over the tech bubble burst rather than dropping all the way down to $62.

When the stock market eventually rebounded, we were able to capture gains up to a limiting factor, in this case, I used a cap rate of 12%.

Cap rates or participation rates will vary based on what type of product you're purchasing, whether life insurance or an annuity, and what time frame and what insurance company you're using as well.

But even at a 12% cap rate, we're not getting 29%, we're getting 12%. We're not getting 26%, we're getting 12%. We end up with $163 instead of $91 during the lost decade.

Obviously, you can see that indexing absolutely wins during a bear market.

How does it do in a bull market? Well, again, your $163 turns into $351 at the end of this 10-year time frame.

If we look at the individual results, we're not earning anything more than 12, we're not earning 31, we're not earning 22, we're not earning 32, we're not earning 15 and 16. But we are earning 0 when the stock market drops.

The point of this is indexing works in any environment.

Whether it's a bull market, whether it's a bear market, the indexing strategy will work, especially if the next 10 years will look similar to what we had in the 2000s, the lost decade. Indexing will absolutely win.

What you should do is ask yourself a question, "What do you think the next 10 years will look like?" Again, we don't have a crystal ball.

Do you think it will look more like the lost decade where we had a major market collapse? We already had one to start with the coronavirus pandemic.

We'll look like a recovery period where we had double-digit gains over a 10-year time frame. Ask yourself that question.

And then ask yourself, "How do you prepare yourself if we do have a lost decade where we have major stock market losses and you end up with less money over a 10-year time frame?"

If you're concerned about that, if you're concerned about your retirement plan, whether you're entering retirement, in retirement, or even 10 or 20 years away from retirement, indexing can be applied to any of those scenarios.

It's important to work with your financial advisor, the one who sent you this video, to talk about indexing.

See if it makes sense for you and see if it can improve your financial plan and avoid devastation if we do have a lost decade moving forward. Thank you.

The information presented here is not specific to any individual's personal circumstances. These videos are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials or may change at any time and without notice. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstance.

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S&P 500 is an unmanaged index of the shares of 500 widely held, predominantly large capitalization, U.S. exchange-listed common stocks. The index results neither include dividends reinvested nor reflect fees and expenses. Investors cannot invest in any index directly. Guarantees provided by insurance products are backed by the claims paying ability of the issuing carrier.

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