If you’re in the home stretch of saving for retirement, you’ll generally hear that your shift into more stable assets like bonds should be gradual, and that you should continue to lean on stocks for the strong returns they’ve historically been known to deliver. In fact, if you’re about a decade away from retirement, you may be inclined to keep a good chunk of your money in a broad mix of stocks to hit your target savings number and wrap up your career with a clear head.
But investors hoping for an upcoming period of strong returns may be in for disappointment. Some experts have been sounding the alarm that the stock market is in for a lost decade — meaning a decade of flat or considerably lower-than-average returns.
If you’re banking on stock market growth to get to your retirement finish line, that’s clearly bad news. Let’s explore why the fear of a lost decade exists and whether you should or shouldn’t believe the hype.
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Stock values are super high
In late 2024, Goldman Sachs estimated that over the following 10 years, the S&P 500 would deliver an annualized nominal total return of 3%. When adjusted for inflation, that 3% drops to 1% in real terms.
Since then, experts have been on high alert for a decade of stagnant returns. And recent CAPE ratio values do paint a somewhat alarming picture.
The cyclically adjusted price-to-earnings (CAPE) ratio, also known as the Shiller P/E ratio, measures the value of the S&P 500 relative to the average of the previous 10 years of reported earnings, with those earnings adjusted for inflation. In contrast to the traditional P/E ratio, which relies on a single year of earnings, the CAPE ratio reduces the impact of short-term fluctuations, providing investors with a more stable and reliable view of the market.
In a nutshell, a higher CAPE ratio suggests the market is overvalued. A lower CAPE ratio suggests there’s room for growth.
As of this writing, the CAPE ratio sits at roughly 42. The last time it rose that high was in the late 1990s, ahead of the dotcom peak.
Many investors remember the stock market imploding in 2000. But what’s equally significant is that, following that crash, investors experienced a “lost decade” during which the S&P 500 produced little to no net growth. And given where the CAPE ratio is today, there’s fear of a repeat.
“Today’s market leaders are generating real earnings and returning capital to shareholders.” — Frank Davis
Some of the fear may be unfounded
The idea of seeing little or no growth in your retirement portfolio can be scary. But before you panic, it’s important to dig deeper.
Matthew Dicken, founder and CEO of Strategic Wealth Designers, makes the important point that concerns about high market valuations aren’t exactly new, yet the market has continued to gain value.
“High valuations increase risk and may lower future returns, but they don’t tell us when markets will reprice,” he says.
Dicken also points out, “Markets rarely move in a straight line… A decade that ultimately produces average or below-average returns can still include periods of significant gains, corrections, and recoveries.”
Frank Davis, President at New Era Financial, points out that while the CAPE ratio has historically been a useful indicator of future long-term returns, today’s market is different from the one investors experienced in 2000.
“Many of the companies driving today’s market gains are highly profitable businesses with strong balance sheets, substantial cash flow, and competitive positions, unlike the technology companies of the dotcom era, which were overhyped on the speculative immediate need,” he explains.
Think back to the year 2000, when Pets.com became the symbol for burning millions on marketing without a clear path to profitability. The company went from a multi-million dollar Super Bowl ad to liquidation in under a year.
“Today’s market leaders are generating real earnings and returning capital to shareholders,” Davis continues, making them far less speculative than the internet darlings of the late 1990s.
What to do if retirement is 10 years out
A potentially overvalued stock market doesn’t necessarily change the game plan for retirement savers who are only a few years or even a decade or so into their investing journeys. If you’re roughly 10 years away from retirement, it’s a different story.
But that doesn’t mean you should resign yourself to a decade of absent returns or, worse yet, dump your stocks in a panic.
“The danger is that investors hear ‘lost decade’ and make drastic allocation changes that end up causing more harm than the risk they’re trying to avoid,” Dicken says. “No one has a crystal ball that works, so investors should focus on being properly diversified.”
Davis agrees.
“Investors should not ignore today’s current valuation concerns,” he says. “Too often, savers who are within 10 years of retirement lack diversification and are taking more sector risk than they should. The greatest risk may not be a major market crash, but rather a prolonged period of mediocre returns after a correction in one sector.”
Dicken recommends constructing a portfolio that goes beyond stocks and bonds across various market sectors.
“Proper diversification includes other assets such as alternatives like private equity and private credit, annuities, precious metals, cash, and sometimes real estate,” he says.
Dicken also says investors who are about a decade out from retirement may benefit from exposure to areas of the market that are trading at more reasonable valuations, including international stocks.
A holistic approach is best
If you’re banking on your stock portfolio to deliver returns that mimic the past decade, it may be time to reset some expectations, Dicken says.
“Retirement plans built on 10% annual returns may need to be stress-tested using more conservative assumptions,” he insists.
That said, Dicken thinks the best approach for the next 10 years isn’t to predict market performance so much as to control the variables you can.
“That includes increasing savings rates, reducing unnecessary debt, maintaining adequate cash reserves, and ensuring [your] portfolio diversification extends beyond a handful of stocks and bonds,” he explains.
Dicken also highlights the importance of preparing for an early market crash, known as the sequence of returns risk.
“A major downturn in the years immediately before or after retirement can have an outsized impact on portfolio longevity,” he explains. “That’s why investors should gradually build a portfolio designed not just for growth, but also for resilience.”
Davis agrees, and thinks it’s wise to maintain a reserve of conservative assets that could help reduce the impact of poor market performance.
Don’t assume all is lost
All told, Davis says, there’s no reason to assume the next 10 years will be a wash for stock market investors. Though history suggests that periods of lower returns are a normal part of the investment cycle, particularly when starting valuations are overly high, that doesn’t mean the market is guaranteed to grossly underperform.
That said, Davis insists that successful retirement plans are not built on forecasts.
“Rather than attempting to predict the market’s next big win, retirement savers are often better served by building a financial plan capable of weathering both strong and weak market environments,” he says.
