The Real Market Lesson Since 2000


by Eric D. Nelson, CFA


Investors have pulled more than $500B from stock mutual funds since 2008.  While some of those outflows have found a home with Exchange Traded Funds (ETFs), most of the exodus is a result of investor fatigue with the stock market as a whole after two brutal downturns since 2000 and the continued volatility associated with global geopolitical risks and a muted and uncertain economic recovery.


As we look back on stock market returns since 2000, its clear that investors have reason for frustration.  The S&P 500, an index of mostly large US “growth” companies, has only returned +1.6% annually through year-end 2012, almost 1% per year less than inflation.  A popular alternative to large US growth stocks are their overseas counterparts.  Unfortunately, developed International growth stocks haven’t performed much better, returning just +2.0% per year over the same stretch.


This disappointment has led investors to shift large amounts of wealth to the bond market.  Since 2008, over $500B in bond mutual fund inflows have mirrored the stock mutual fund outflows.  Part of this is based on the belief that past bond performance since 2000 will continue, which fails to account for the large and unrepeatable decline in interest rates over this period that has boosted bond prices.  Others accept that bond returns will be minuscule in the future as interest rates sit at generational lows, but are willing to accept these results so long as they do not have to endure another stock bear market.  In either case, the lesson many investors have taken away from the market since 2000 is that stocks are no longer a worthwhile investment due to their high risk and low returns.


But the real lesson investors should take away from this period is that to be a successful investor and achieve the entire benefit of stocks, you need to diversify broadly amongst distinct asset classes.  As Table 1 shows, the poor returns since 2000 for US and International large cap growth stocks have been the exception and not the rule.


Chart 1: “Core” Asset Class Returns (2000-2012)

Asset Class/Portfolio

Annualized Returns

Growth of $1

2000-2002 Total Return

2008 Total Return

S&P 500 (US Large Growth)





US Large Value





US Small Value










International Large Growth





International Large Value





International Small Value





Emerging Markets Value










60/40 Balanced Allocation





60/40 Value Allocation






If we look at US large and small value stocks, we see returns of +6.2% to +10.2% per year.  International developed large and small value stocks produced very similar results that were well in excess of International large cap growth stocks.  Emerging Markets value stocks in particular did exceedingly well, with annual returns of over 11%.  In each case, global large and small value asset classes doubled, tripled, or even quadrupled in value.


But it wasn’t necessary to put everything in large and small value stocks over this period to earn reasonable returns.  As the “60/40” allocations show, investors still could have maintained portfolio balance and achieved acceptable results.  The “Balanced Allocation”, which includes a mix of large and small, growth and value stocks in the US and non-US markets, as well as 40% in high-quality 5YR government bonds, earned a respectable 8.3% per year, turning $1 into almost $3 by 2012.  The “Value Allocation” holds only large and small value stocks in US and non-US markets along with 40% in high-quality 5YR government bonds, and produced a 9.3% annual return, turning $1 into more than $3.  Both balanced allocations also produced those returns with much smaller declines during the 2000-2002 and 2008 bear markets.


Because no one can reliably predict future stock market returns, investors would be wise to learn the real market lesson from 2000: individual asset classes can and do go long periods with disappointing returns.  To avoid allowing one bad result from devastating your entire portfolio, you should diversify broadly across asset classes and hold a balanced portfolio that is most appropriate for your circumstances.



Mutual Fund Asset Flow Source: Investment Company Institute (ICI) and Dimensional Fund Advisors (DFA)

Asset Class Sources: S&P 500 = DFA US Large Company Fund (DFUSX), US Large Value = DFA US Large Value Fund (DFLVX), US Small Value = DFA US Small Value Fund (DFSVX), International Large Growth = DFA Large Cap Int’l Fund (DFALX), International Large Value = DFA Int’l Value Fund (DFIVX), International Small Value = DFA Int’l Small Value Fund (DISVX), Emerging Markets Value = DFA Emerging Market Value Fund (DFEVX), 5YR Government Bonds = DFA Intermediate Government Fund (DFIGX)

60/40 Balanced Allocation = 12% S&P 500, 12% US Large Value, 18% US Small Value, 6% each Int’l Value, Int’l Small Value, Emerging Markets Value, 40% 5YR Government Bonds; rebalanced annually

60/40 Value Allocation = 17% US Large Value, 25% US Small Value, 3% Int’l Value, 9% Int’l Small Value, 6% Emerging Markets Value, 40% 5YR Government Bonds; rebalanced annually



Past performance is not a guarantee of future results.  The returns and other characteristics of the allocation mixes contained in this article are based on model/back-tested simulations to demonstrate broad economic principles.  They were achieved with the benefit of hindsight and do not represent actual investment performance. There are limitations inherent in model performance; it does not reflect trading in actual accounts and may not reflect the impact that economic and market factors may have had on an advisor’s decision-making if the advisor were managing actual client money. Model performance is hypothetical and is for illustrative purposes only.  Model performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. Clients’ investment returns would be reduced by the advisory fees and other expenses they would incur in the management of their accounts.  Past performance is not a guarantee of future results, and there is always the risk that an investor may lose money.  Indexes are not available for direct investment.