Day: December 26, 2008

The Lost Decade and How to Avoid Another One

A broad-reaching reevaluation has been forced on both financial planners and retirees by the drastic down-trend in the financial markets.  In my last commentary on retirement planning, I cited the work of Wharton professor Jeremy Siegel, who has used risk analysis and other forms of statistical analysis to estimate that it takes about twenty years for a “balanced” stock portfolio–retirement or otherwise–to produce optimum returns. 

Okay, 20 years, two decades.  I assume this includes the ten years that the financial media keep referring to as the “lost decade”–the ten years leading from 1998 to the present.  Apparently, the reason it is dubbed lost is that after inflation is accounted for, the S&P 500 has gained only 1.3% in the past decade, and investors in equities saw their funds stand still while the economic engines idled.  Ten years is a big portion of a person’s life and puts a big dent in a retired person’s income security.  The large-scale effect of this is magnified by the fact that increasing numbers of people have turned to  equities in their retirement planning.

Most of the comment I’ve read on how investors can avoid another lost decade of flat returns and outright losses identifies portfolio balance as the best protection.  Although balance is defined by any number of criteria, the key element is diversification–both among types of investments and among stocks. And interestingly enough, Monte Carlo simulation is consistently cited as the tool to calculate the returns and timing of returns of various balancing schemes.