Media commentary has described the first decade of the 20th century as a lost decade for equity investors, with no positive return from the equity market over the 10 years from 2000 to 2009.

However, that depends on how you define the equity market. In the US, for instance, investors who defined the market as purely the S&P 500 suffered negative returns over the decade and those who were invested only in large US stocks did even worse.

But fortunately, for fully diversified investors, the story was a much better one. US small value stocks, for instance, provided a positive annualised compound return of just over 10 per cent in the first decade of the century. Gains also were evident in international markets in all equity asset classes other than growth stocks. And for those who had exposure to stocks in emerging markets – the fast growing economies of the developing world – the story was even better.

So the message out of this is that diversification works. By defining the equity market more broadly than just large cap stocks in a single country to encompass small, value, international and emerging market equities, investors can spread their risk and protect themselves against the inevitable down times.

 

Annualised Compound Returns (%)

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