The S&P 500 lost decade - how to protect your retirement
- Noel Watson
- 5 hours ago
- 8 min read
Introduction
The S&P 500 is an index that tracks the performance of the largest 500 listed companies in the United States. The index has performed very well in recent years compared to other stock markets worldwide, but this hasn't always been the case. In this blog, we look further back in time, focusing on periods when returns haven't been quite so good for the S&P 500 and evaluate what steps you might consider taking to protect your retirement income.
Recent history - a tech story
In recent years, the largest names in the S&P 500 by market capitalisation have tended to be some of the well-known technology-focused companies. A few years ago, the FAANG stocks (Facebook (before it became META), Amazon, Apple, Netflix and Google) were all the rage. The latest buzzword is the "Magnificent Seven" (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla). A breakdown of the top 10 holdings in a Vanguard S&P 500 index tracker is shown below, with the "magnificent seven" comprising over 30% of the index.
Analysis of comparative returns over the fifteen years to the end of 2024 paints an interesting picture, with the S&P 500 generating over double the returns (806% vs 384%) of global equities (represented by the MSCI All Country World Index). Emerging markets and global bonds trailed by a long way!
The S&P 500 lost decade: 2000 to 2010
Many might wonder whether there is any point in investing anywhere other than the S&P 500, given the results over the last fifteen years. Looking back in recent history to the period from 2000 to 2010 may give us the answer. During this decade, S&P 500 investors had to contend with two significant market downturns: the aftermath of the .com bubble and the Global Financial Crisis (GFC). This turbulence led to the S&P 500 experiencing a negative return over the decade (January 1, 2000 - December 31, 2009).
If you look back at news articles published towards the end of the lost decade, you can see how the mood was very different to today.
"All of the growth in the world is expected to be in emerging markets, and nobody doubts their stability anymore (warning!). So why bother with US equities?"
"Baby boomers are terrified for their retirements. The last thing they want is to lose their cash in another market crash. So they're going to fixed-income"
Now that stocks have recovered some losses, advisers say many clients are seizing the opportunity to cash out of equities and invest more cautiously in the future.
Clients come to financial planners like Frank Boucher, based in Reston, Va., saying they want no exposure to the stock market at all. Boucher warns them that, without the chance for equity gains, they might need to work longer, save more, or spend less. "They say, 'That's fine. At least I get to sleep at night,'
People have had a tough time getting behind equities. It has been a rough year," he said, referring to the year-to-date net outflow of $4.8 billion from U.S. equity funds. Non-domestic U.S. equity funds, however, managed to pull in $152 million, illustrating the negative focus on U.S. equities. Taxable bond funds pulled in a net $4.8 billion, while the safe-haven play -- money market funds -- pulled in a net $6.2 billion.
Since the beginning of 2008, stock mutual funds have suffered cash outflows totalling roughly $245 billion.
Was this S&P 500 "lost decade" a one-off?
Was this lost decade a "one-off"? Fortunately, we are lucky to have returns data for the S&P 500 going back to 1926 to investigate. The one caveat is that we don't have historical data for exchange rates stretching back as far, so we will use USD returns for this analysis. For the 2000-2010 period, the inability to convert to sterling didn't make much of a difference (but it might have done for the other periods we will analyse below).
Looking at the returns for the S&P 500 from 1926 (on a logarithmic scale), we can pick out the 2000-2010 lost decade (along with the two market downturns during that time) mentioned above.
The aftermath of the Great Depression is also evident, resulting in another lost decade from 1929 to 1939.
If we cherry-pick our starting date, we can see that the S&P 500 was still below its September 1929 level 15 years later!
The period from 1964 to 1974 was also not far from being a lost decade, with the 1973-1974 stock market crash occurring from 1973-1974.
Again, the press proclaimed the death of equities a few years later!
2000-2010 S&P 500 returns vs other indices
We've seen how the S&P 500 is susceptible to a lost decade - let's now compare how the other indices reviewed earlier fared. Recall that the returns for the fifteen years to the end of 2024 had the S&P 500 leading the pack.
S&P 500
Developed markets (equities)
Global markets (equities)
Emerging markets (equities)
Global bonds
However, examining the returns of the S&P 500 over the lost decade in comparison to other indices paints a very different picture. The 2000-2010 returns "league table" is almost a mirror image of that of 2014-2024!
Emerging markets (equities)
Global bonds
Global markets (equities)
Developed markets (equities)
S&P 500
S&P 500 vs a real-world portfolio
We will now use Portfolio Visualizer (which is US-based and therefore reports in dollars) to compare the S&P 500 to a more diversified "real-world" portfolio, specifically a 60/40 "No Brainer" with factor tilts. For the 15 years to the end of 2024, the S&P 500 portfolio (Portfolio 2 in red) has returned over double the diversified portfolio ($68,609 vs. $27,680).
However, if we refer back to our lost decade, we can see two things:
The diversified portfolio far outperformed the S&P 500.
The diversified portfolio had broadly similar returns over two periods (6.49% vs 7.02%)
If we look over the whole period (January 2000-December 2024), we can see that the S&P 500 has generated greater returns than our diversifed portfolio (7.57% vs 6.81%) albeit with greater volatility (15.31% vs 10.12%) and a greater maximum drawdown (-50.97% vs -34.86%). We discuss this in the context of Sequence of Returns Risk below. It's interesting to note that the S&P 500 didn't pull significantly ahead until the end of 2023.
The above analysis assumes perfect investor behaviour. In reality, we would expect our S&P 500 investor to display a larger behaviour gap versus the holder of the diversified portfolio, as many investors may have struggled through the 2000-2010 period, with some selling up and swearing off equities for life.
As mentioned above, the worst-case maximum drawdown for the diversified portfolio versus the S&P 500 over this period was much smaller, and we can see this reflected in the annual returns below. The S&P 500 fell by more than 10% over a calendar year four times (2000, 2001, 2002, and 2008), whereas for the diversified portfolio, this occurred just once in 2008.
What does this mean for creating a sustainable retirement income in the real world?
Let's first start by using Portfolio Visualizer to examine how someone retiring at the start of the lost decade would have fared taking an inflation-adjusted 5% a year from our two portfolios. Alas, things would have been very challenging for our S&P 500 investor, with the investment pot being exhausted by 2017. In contrast, for the holder of the diversified portfolio, things have been more positive, with the balance after 17 years being above the starting amount (in nominal terms).
This may come as a surprise, as our analysis above showed the diversified and S&P 500 portfolios having broadly similar balances after 20 years (2000-2020). The difference is down to the Sequence of Returns Risk (SORR). SORR shows that the order of returns when a retiree is drawing on their portfolio is important, and the S&P 500 lost decade severely impacted the sustainability of the retirement portfolio.
We will now use Timeline to look further back in time. We will use a starting balance of £1,000,000, inflation-adjusted withdrawals of 5% pa and a retirement horizon of 20 years. Our diversified portfolio will be as follows:
36% developed market equity
12% developed market small-cap value
12% emerging market equity
40% global bonds
The S&P 500 will represent the total US equity market. While not an exact match, the differences are not substantial (see Portfolio 1 vs. Portfolio 2). We will begin our analysis from 1926 onwards, when historical data for all asset classes in our analysis became available.
Starting with the US total market portfolio, there were three periods during which a 5% inflation-adjusted return was not sustainable. Unsurprisingly, they occur around the same time as the three challenging periods mentioned above.
There were 17 months during the Great Depression when 5% withdrawals were not sustainable. Some months dipped below 4%.
There were 66 periods from the mid-1960s to the early 1970s.
There were 11 periods from the early 2000s onwards, as analysed above.
This results in a total of 94 months out of 948 months where a 5% (£50,000) withdrawal wasn't sustainable, which is almost 10%.
In marked contrast, our diversified portfolio struggles to support a 5% starting withdrawal rate for only 10 months in the late 1960s, dropping to a low of 4.8%.
Conclusion
The S&P 500 has gone through some very challenging times over the last century. We have seen that the bad times can be challenging, both emotionally (see the comments from various articles above) and from a retirement sustainability point of view.
While ignoring long-term historical outcomes and investing in "what is working now" can be tempting, it is one of many retirement planning choices that can be detrimental to your retirement plan. We find that short-term performance chasers don't tend to be a good fit for our retirement planning service. They say that diversification is the one free lunch in finance; this is particularly important when planning a sustainable retirement.
There is always the chance that "this time is different". It is possible, and the S&P 500 may continue to outperform other indices, avoiding another lost decade. However, it may not, and the downsides are severe enough that we would struggle to see how someone could base their retirement planning using such an approach.
Want to find out more?
If you would like help to building a robust retirement portfolio that minimises the risk of a lost decade and helps provide a sustainable retirement income, please get in touch.
About us
The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide financial advice on pensions, investments, and inheritance tax.
Our office telephone number is 01932 645150.
Our office address is No 5, The Heights, Weybridge KT13 0NY.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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