Searching For Lost Decades

This paper estimates the probability of a lost decade, where equity investments lose value over a ten year period. The findings are a reminder that equity investments are risky even over longer time periods, and investors should take this into consideration when making portfolio choices. It also introduces a simple method to allow the reader to combine beliefs about long run stock returns along with computer simulated return distributions. Finally, it is shown that mistaken perceptions of using arithmetic means could account for some common misconceptions about the chance of losses over a decade. ∗International Business School, Brandeis University, 415 South Street, Mailstop 32, Waltham, MA 02453 2728, [email protected], www.brandeis.edu/∼blebaron. The author is also a research associate at the National Bureau of Economic Research.