What’s the Probability of a Lost Decade in the S&P 500?

Imagine investing your hard-earned money in the stock market, waiting a full decade, and seeing little to no growth, or even a loss. That’s the dreaded “lost decade” for the S&P 500, a period where the market barely budges, leaving investors frustrated.

But how likely is it to happen again? Spoiler: it’s rarer than you might think, luckily. Let’s dive into the history, the odds, and a smart strategy to protect your portfolio, based on a century of data.

Related: –Quantified investment strategies

What is a Lost Decade?

A lost decade occurs when the S&P 500, a key benchmark for U.S. stocks, delivers negligible or negative total returns over a 10-year period or longer. It’s a nightmare scenario for investors, especially those saving for retirement or big life goals.

These periods are marked by significant market declines, often over 50%, and long recovery times. But the good news? They’re not as common as you might fear.

A Look at History: When Did Lost Decades Happen?

From 1920 to 2020, the S&P 500 experienced just three lost decades, according to data analysis from Of Dollars and Data.

The three most prominent lost decades in U.S. stock market history occurred in the 1930s, the 1970s, and the 2000s. U.S. stocks declined by 50% (or more) in each of these periods and took around a decade to recover.

Let’s break them down:

• 1930s (Great Depression): The stock market crashed dramatically, dropping over 50%. It took until the late 1940s for stocks to recover to their 1929 levels. Economic turmoil defined this era, making it a textbook lost decade.
• 1970s: High inflation, oil shocks, and economic stagnation hit hard. Stocks fell significantly, and it took about a decade to regain ground, marking another lost decade.
• 2000s: This period was a double whammy, with the dot-com bubble bursting in 2000 and the 2008 financial crisis slamming markets. Stocks dropped over 50% again, and recovery stretched roughly 10 years.

These three periods stand out, but they’re exceptions in a century of market data. Out of 10 decades, only 30% were lost, meaning 70% of the time, the S&P 500 delivered positive returns over 10 years (not considering rolling returns). That’s a reassuring stat for long-term investors, but it also reminds us that lost decades, while rare, can happen during major economic disruptions.

How Likely is Another Lost Decade?

So, what’s the probability of facing another lost decade today? Based on historical trends, the odds are low—about 30%, given the three occurrences in a century. The other 70% of decades saw growth, suggesting the market is more likely to reward patient investors.

However, lost decades tend to follow big economic shocks, like depressions or financial crises. Could we see another one? It’s possible, especially with uncertainties.

Dollar Cost Averaging: Your Shield Against Lost Decades

Worried about a lost decade?

There’s a strategy that can help: dollar cost averaging (DCA). This involves investing a fixed amount regularly, say, $500 a month, regardless of market conditions. By spreading your investments over time, you buy more shares when prices are low and fewer when they’re high, smoothing your average cost.

The data backs this up. Simulations from 1920 to 2020 show a 10-year DCA strategy in an 80/20 stock-and-bond portfolio beat inflation 89% of the time, according to the above-linked article by Dollars and Data.

Source: Ofdollarsanddta.com

Let’s look at some examples:

• 1965-1974 (Bear Market): During a rough decade with a 40%+ market drop, a $833 monthly investment totaled $68,000 by 1974. It is not ideal, but it is far better than a lump-sum investment at the peak.
• 2000-2009 (Lost Decade): Even in this tough period, DCA slightly outperformed inflation, keeping your purchasing power intact.

DCA shines because it reduces the risk of investing a lump sum at the wrong time. In fact, the only 13-month period where DCA lagged inflation was during the 1998-1999 dot-com bubble peak—a rare exception.

Stretch your horizon to 20 years, and DCA’s power grows. From the 1980s to late 1990s, every dollar invested grew to about $4 in real terms, adjusted for inflation. This shows that staying consistent over longer periods nearly eliminates the risk of real losses.

Takeaway: Stay Invested, Stay Smart

The probability of another lost decade in the S&P 500 is low, about 30% based on history. If you used dollar cost averaging, you reduce the likelihood to 89%, which is not bad. Economic shocks can strike, and markets can stall. Yet, with dollar cost averaging, you can weather these storms. By investing regularly, you reduce risk and position yourself for growth, as the market has delivered positive returns 70% of the time over decades.

The key? Stay disciplined and think long-term. Markets will dip, but history shows they trend upward. Want to start? Set up a monthly investment plan, even if it’s small, and let DCA work its magic.