Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. The more different you are from the person that defined a rule the less you should follow the rule. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.

Unconventional wisdom: Are we on the cusp of a lost decade?

“Never make predictions, especially about the future.”

- Casey Stengel

There has been a good deal of speculation in the financial media about an upcoming lost decade for investors. How much these predictions are resonating with investors is unsurprising.

There is heightened anxiety about whatever is going on in Washington. There is a sense that we are at an inflection point between an era of globalisation and one with more protectionism and economic nationalism. And there is the simple fact that negativity sells. Why predict one bad year when you can go for a whole decade?

The origin of the lost decade

The idea of a lost decade most often refers to the period after the .com bubble burst in early 2000. In that first decade of the new millennium the S&P 500 delivered annualised price returns -0.95%. Not a great time for investors.

The .com crash caused a 49.10% drop in the S&P 500. Before the market had fully recovered came the Global Financial Crisis (“GFC”) where the S&P 500 fell 56.80%. These were the two biggest market drops since the Great Depression and they both occurred in a ten year span.

Are we in a similar situation as early 2000?

I’m a fan of history. History provides perspective. When I reflect on history it pulls me out of the trap of thinking I’m living through an exceptional or unique time. This makes me a better investor and a better citizen.

Yet a cursory review of history doesn’t provide a roadmap for the future. What happened in the past is known. Yet those facts can be interpreted and manipulated in many ways. And the future is anyone’s guess. With that caveat let’s explore the similarities and differences between the market now and the market at the turn of the millennium.

Valuation is a good lens to view markets. The S&P 500’s cyclically adjusted price to earnings (“CAPE”) ratio was 43.77 in January of 2000. That was the third highest reading since 1871 with the highest levels reached in late 1999.

Entering 2025 the S&P 500 was trading at a CAPE ratio of just above 37. That is not quite as expensive as it was in early 2000 but is still historically high.

Valuation is an interesting overlay on markets but when crafting a historical narratvie it can give the impression that an event was inevitable and therefore predictable before it happened.

As I said in an earlier version of this column – things look clearer through the rear-view mirror than the windshield. The market can be expense and get more expensive. The market can get cheaper without some cataclysmic crash if prices stay level and earnings grow.

Yet valuations still matter. Investors often lose sight of that. Recency bias means that as markets go up the expectation is the trend will continue. Things feel safer even though they aren’t.

This comes across in conversations I’m having with investors. I can sense anxiety. But I also hear rationalisations for why things won’t get bad. Most of those rationalisations can be chalked up to recency bias.

Is market concentration an issue?

I often hear forecasters cite similarities between the concentration in the market back in 2000 and today. In 2000 technology shares made up 33% of the S&P 500. Today it is 31%.

Pointing out the parallels between the concentration in technology seems to be a way to suggest the market will suffer the same fate. I have trouble making that leap. Technology is a scalable business model. It has scaled.

However, there is another measure of concentration where the market today is much more concentrated than the heights of the .com bubble.

Back in 2000 the top 10 stocks in the S&P 500 made up 23.30% of the index. Currently the top 10 shares in the S&P 500 make up 33.98% of the index. The concentration record was set in 2024 with 38% of the index in the top 10 holdings.

A concentrated market becomes a bear market when the largest shares fall. That is what happened in the lost decade. The following chart shows the top 10 shares in the S&P 500 at the start of 2000 and their performance over the next decade.

Top 10

This is a remarkable chart. Except for Exxon Mobil which performed well and Walmart the performance of the remaining eight shares was shockingly poor.

How much has the rise of passive changed the market?

The market run in the late 1990s was driven by new investors flocking to the recently launched online brokers. Today it is driven by new investors buying passive investments.

The concentration in the market is unsurprising as the amount of assets invested passively has grown significantly. In the year 2000 passive investments made up 12% of total US assets. Today passive makes up over 50%.

I’m not one of the people who believes that passive investing is ruining world. I’m also not an active fund manager. There is a meaningful correlation between passive critics and the people that benefit financially from active management.

However, the rise of passive likely played a significant role in the levels of concentration we see today. In 2000 22.30 cents of every dollar invested in the S&P 500 went to the top 10 shares. Today it is close to 34 cents.

If a bear market or lost decade occurs a good portion of the selling will have to come from holders of passive investments. I’ve heard it suggested this won’t happen since so many people have embraced passive investing. I think people who think this way confuse passive investing and passive investments.

As I pointed out in an earlier column many people are simply using passive investments to time the market by trading ETFs.

I have no doubt that if there is a panic these mischaracterised passive ‘investors’ will sell in droves. These people are not going to sit around pontificating about John Bogle and the art of doing nothing. They are focused on the short-term.

None of that is a prediction that we are set for a fall. I simply think some of these high-level arguments we often hear aren’t interrogated.

The market will not crash because it is concentrated. The market is not safer because of the rise of passive. People will still panic and get greedy. The fundamentals still matter.

The high-level story of the lost decade is incomplete

Blanket statements that shares are expensive or cheap ignore the nuance within a market. In 2000 certain parts of the market were expensive including large cap and technology shares. That wasn’t the whole market.

These differences played out in the returns over the decade. The S&P 500 had a negative return for the decade. The tech heavy Nasdaq didn’t regain the highs in 2000 until 2015.

Dig a little deeper into the data and it is obvious that the lost decade was really a case of large companies performing poorly and taking down the market capitalisation weighted index with them.

The average S&P 500 share was up as evidenced by the 5.10% percent annualised return of the S&P 500 equal weighted index. The S&P 500 Midcap index was up 6.40% per year and the S&P 500 Small Cap index was up 6.30% annually. This isn’t bad considering the depths of the two bear markets during the decade.

Is the market expensive now or just parts of it?

There is no denying that the market is trading at historically high valuation levels. That is reflected in the CAPE. However, this again appears to be a case where the large companies are expensive that make up a disproportionate share of indexes.

I’ve divided all the shares that our analysts cover into quintiles based on their price to fair value. A price to fair value below 1 indicates our analysts think a share is undervalued. Over 1 and we think it is overvalued.

I’ve included the average market capitalisation of each valuation quintile. The market capitalisation is the share price multiplied by the number of shares outstanding. This is how much a company is worth and it is used to weight a share in a market capitalisation weighted index like the S&P 500 or ASX 200.

In the US our analysts cover 717 companies. As you can see in the chart below the most expensive quintile contains the largest shares. Out of the 717 US companies we cover 485 or 68% are undervalued.

Quintile one

In Australia it is a similar picture. The two most expensive quintiles are the largest shares. In our coverage universe 65% of shares are undervalued.

Quintile two

What should you do about this?

It is always humbling to read comments on podcast videos on YouTube. Shani and I did an episode on Trump and tariffs and one viewer did not like our advice to focus on your investment strategy and not overreact. The comment was:

“You get paid to come up with the advice ‘do nothing’? Wow – Morningstar subscribers must really think they are getting their money’s worth out of this one.”

Fair enough. Sticking with your plan is boring. Consistency and patience isn’t sexy. We would have gotten far more attention yelling about shorting the market. But just because people want short-term forecasts which are comically inaccurate doesn’t mean they provide any value.

Successful investing means tilting a portfolio in a certain direction. Dramatic changes may seem bold but to do it well requires getting the time and direction of the turn right. That is very difficult to do.

My own response to the concentration in the Australian market is illustrative of a tilt. Maybe I’m right and maybe I’m wrong. Either way it is not going to blow up my finances.

The large mining and banking shares that dominate the local market don’t fit my investment strategy. These are not shares that I would consider on an individual basis. However, I’m not so opposed to owning these companies that I would avoid them at all costs.

For several years I had been regularly contributing money into the Vanguard Australian Shares High Yield ETF (ASX: VHY). They make up some of the largest positions in the ETF.

Around 18 months ago my desire to avoid the banks and miners increased. I just couldn’t really see any pathway for them to do well over the long-term. I simply stopped putting money into VHY and instead choose to get my Australian exposure through VanEck Australian Equal Weighted ETF (ASX: MVW).

This doesn’t eliminate exposure to the banks and miners. It is still Australia. But it tilts my portfolio away from larger shares and into mid-cap shares. I still own VHY so this was not a radical move.

I believe in expressing my views subtley – I have the humility to accept they could be wrong. At least over the short-term my decision to tilt away from the banks didn’t work out well. They all skyrocketed last year. I still think I’m right over the long-term but my future isn’t resting on my view.

Final thoughts

I am the first person to admit that I’m pessimistic about the stock market. This hasn’t been the first time. I see a bear market around every corner. Yet I haven’t sold anything. I’m in this for the long-term.

I will admit that I like reading long-term predictions about where the market is going to go. I find it more intellectually stimulating than just listening to some short-term share market cheerleader.

I also wouldn’t radically change anything I’m doing based on these forecasts. I have a goal and a plan to get there. I’m going to stick to it and suggest you do the same. That is my advice – no matter how boring and worthless people think it is.

Please share any thoughts or topic suggestions with me at [email protected]

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What I’ve been eating

The little side dishes served at Korean meals are called banchan. The more Banchan served the more formal the meal. Korean royal cuisine adds 12 dishes to the basic banchan. Banchan’s origin was from the Three Kingdoms period of Korea’s history when there was a prohibition on eating meat - hard to believe given the central role meat plays in Korean BBQ. The picture below is from a Korean BBQ restaurant named Kogi in Sydney.

Korean