Annualized Returns for Stock Market Indices By Decade (1980s - Present)

In my previous post, I discussed annual stock market and bond market returns for various indices for the time period from 1980-2008. Viewing annual returns since 1980 can be very illuminating and show the impressive effects of annual compounding of investment returns over time. However, even more information may be gleaned by viewing index returns on a decade-by-decade basis.

The chart below (click on the chart for a larger view) illustrates decade-by-decade returns for various stock and bond indices during the 1980s, 1990s, and 2000s (through 2008). The chart below illuistrates returns for small cap indices (Russell 2000, Russell 2000 Value, and Russell 2000 Growth), large cap indices (S&P 500, S&P/Citi 500 Value*, and S&P/Citi 500 Growth*), a broad-based foreign stock index (the Morgan Stanley Capital International Index for the developed stock markets of Europe, Australasia, and the Far East ("MSCI EAFE index")), an index of bonds (Lehman Brothers Aggregate Bond Index ("LB Agg.")), and the Nasdaq Composite Index.

Only three of the indices tracked have provided positive returns for each decade since the 1980s: the Russell 2000 Value, Russell 2000, and LB Agg. The Russell 2000 Value provided annualized returns of 17.44% during the 1980s, 12.45% during the 1990s, and 6.98% so far in the 2000s.

As everyone now knows, there was a tremendous stock market bubble which accumulated throughout the 1990s. The Nasdaq Composite was one of the primary beneficiaries of the bubble valuations, rising a whopping annualized 24.5% throughout the 1990s, for a total return of about 794%. Such returns proved to be unsustainable, however, as the Nasdaq Composite has droppjavascript:void(0)ed a total of about 61% since 2000, for an annualized return during the 2000s (through 2008) of -10%.

The MSCI EAFE Index was also the beneficiary of a bubble, although it rose to lofty valuations during the Japan equity bubble of the 1980s. During the 1980s, the MSCI EAFE Index rose an impressive 630%, or about 22% on an annualized basis. Returns during the 1990s were far worse, with the MSCI EAFE Index rising only 96.99%, or about 7% per year. The MSCI has provided negative returns during the 2000s, dropping a total of 14.71%, or about 1.75% per year.

The S&P 500 Index provided strong and steady returns during the 1980s and 1990s until the U.S. stock market bubble burst in 2000. The S&P 500 Index returned about 403% during the 1980s and an additional 432% during the 1990s, for annualized returns during those decades of about 17.5% and 18.2%, respectively. The 2000s, however, have been far worse, with the index dropping 28% so far through 2008, for an annualized return of about -3.6%.

The returns shown in the chart above show the volatility that investors may face when chasing performance. The biggest winner of the 1990s (the MSCI EAFE Index) has lagged other indices since the 1990s, and the winners during the 1990s (e.g., the S&P 500 indices and the Nasdaq Composite) have substantially lagged during the 2000s (up through 2008). I can only speculate as to which indices will outperform during the coming decades. However, I would bet that Small Cap Value stocks will continue to outperform other indices over long periods of time.