Stock performance following a bad decade

The new year is approaching and soon investors will be scouring over year-end performance reports. Sadly, one of the most common mistakes investors will make is using past performance as the basis for their investment decisions.

Those that harp on past performance may find it difficult to invest in equities following a decade that was plagued by two brutal bear markets. But shunning equities may be a mistake.

Consider the table below.

Each time the average ten-year return of the S&P 500 was below 6%, the following ten-year period has been very good to investors, with an average return of 13.14%. The following 20-year period is even more impressive, averaging 14.82% per year.

There are no guarantees this trend will continue going forward. After all, it’s impossible to consistently predict the direction of the market (see my June 30, 2009 post: Are you chasing performance?).

Still, the table above should at least make you rethink shunning equities for emotional reasons.

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Peter J. Lazaroff, Investment Analyst