How to Avoid Another Lost Decade in Equities

The current speculative environment seems to increasingly resemble the Technology Bubble of 1999/2000. Leadership is narrow, valuation dispersions are massive, relative strength and momentum are the primary drivers of performance, and investors are shunning diversification to take impulsive near-record portfolio risk.

All bubbles eventually burst, and the bursting of the Tech Bubble led to the so-called lost decade in equities during which the S&P 500® provided negative returns for a decade. When today’s speculative burst ends, the equity markets’ extreme concentration again makes it likely an extended period of subpar performance for equities will occur.

Today’s consensus remains focused on the Magnificent 7¹ stocks, but no sound financial theory counsels that seven stocks constitute a well-diversified portfolio as a core for building wealth. The possibility of another lost decade in equities and the broad range of investment opportunities outside the Magnificent 7 leads us to position our portfolios with significant diversification (See Chart 1).

providing diversification