Arnott On Why It Wasn’t A Lost Decade

The “Lost Decade”: It’s a moniker that many stock market commentators have applied to the 2000s, a decade in which we saw two major bear markets and the S&P 500 benchmark ended up well in the red. But that doesn’t tell the whole story.

“It was only a lost decade if you anchored on equities as your core holding and you relied on cap-weighting,” Rob Arnott of Research Affiliates tells Bloomberg. “It was a lost decade for most investors, but it didn’t have to be.”

Arnott was referring to the difference between cap-weighted indexing, in which the companies in different indexes are weighted based on their market capitalization, and other non-cap-weighted indexing. According to Bloomberg, the S&P 500 Equal Weighted Index (which gives all 500 holdings the same weighting) rose 66% from the peak of the dot-com bubble through Dec. 2 of this year, while the more popular cap-weighted S&P 500 was down sharply. (Arnott uses fundamental indexing, which weights the companies in an index by the size of their business, not their market cap. He also focuses on an approach that is more diversified in terms of different asset classes than most investors, which he has said would’ve helped many investors during the “Lost Decade”.)

Cliff Asness of hedge fund AQR said the difference was a reflection of smaller-cap stocks and lower-valued shares doing well during the supposed “Lost Decade”. Asness says that most investors’ index holdings are cap-weighted, so they missed out. “Sorry, I’m not sure it means more than small-cap and cheap stocks had a good decade,” Asness said. “If you add us all up, we add up to cap-weighted, not equal- weighted indexes.”