Stocks are the best asset class for long-term investors, right? Well, it depends on your definition of “long-term.” More importantly, it depends on the valuation of stocks when you buy them.
When stocks are cheap, they usually make an excellent investment over the long run. When stocks are really expensive, as they were at the beginning of the decade, they can be terrible investment over the long run.
Case in point: The total return on the S&P 500 for the past 10 years was -9%. Ouch.
And that’s before adjusting for inflation. Once you factor inflation in, the return is a heck of a lot worse.
The good news: After a decade as crappy as the one we just had, stocks tend to do OK over the next decade. The worst return in the 10 years after any decade with a negative total return–including the Great Depression–is more than 100%. So we’ve got that going for us.
Handy chart from Merrill’s Richard Bernstein: