What it means
Economists use the phrase to describe a stretch of stagnation after a boom or a crisis. Typically a bubble in property or shares bursts, banks are left with bad loans, companies and households cut spending to repay debt, and growth stays weak for years.
Falling prices (deflation) can make matters worse by raising the real burden of debt. Japan is the best-known case.
After asset prices rose sharply in the 1980s and then collapsed, the economy grew slowly for years, and the stock market took a long time to recover its earlier peak. The experience was later stretched in popular writing to "lost decades" in the plural, as weak growth continued.
The phrase is also used in investing. If a major stock index ends a ten-year period at or below where it started, commentators call it a lost decade for investors.
Latin America's debt crisis in the 1980s is another period often described this way for economic output. The idea matters for planning.
Many financial plans assume steady long-run returns, but a long stretch of poor results early in retirement can do lasting harm, a danger known as sequence of returns risk. Diversification across countries and asset classes, and regular contributions, reduce the chance of being caught in one market's lost decade.
Inflation makes it worse. A decade of flat nominal returns is a loss in real terms, because prices rise while the investment value stays still.
Whether a given period qualifies is a matter of judgement, as there is no formal definition. Policy responses are debated.
Governments and central banks may cut interest rates, increase public spending or rescue banks, while critics argue that acting too slowly or too weakly prolongs the pain. The experience of different countries shows that cleaning up bad debts early tends to shorten the period of weakness.
In practice
Real-world examples.
Example
A retiree who started withdrawing from a stock portfolio just before a decade of flat markets finds her savings falling much faster than planned. Withdrawals during the weak years leave less capital to benefit from the recovery, so she considers lowering her withdrawal rate and holding a cash buffer.
Example
A pension fund trustee reviews a long history of returns and sees several ten-year periods when shares barely moved. She argues for holding bonds, property and overseas shares as well as domestic equities.
Example
A government economist studies a country in which output has been stagnant for ten years. She recommends tackling bad bank debts, because credit conditions have kept companies from investing. She also suggests reforms that would make banks recognise losses sooner.
Formula
Calculation
Real value = Nominal value / (1 + Inflation rate) raised to the number of years
Annualised return = (Ending value / Starting value) raised to 1/years - 1
Suppose an investor puts $100,000 into an index fund that ends the decade at exactly $100,000, so the nominal annualised return is 0%.
With inflation at an assumed average of 2% a year, the price level rises by a factor of 1.02 raised to the power of 10, which is about 1.219.
Real value = $100,000 / 1.219 = about $82,035.
The investor has lost about $17,965 of purchasing power, a fall of roughly 18%, despite showing no change in nominal terms.Case study
Seen in the real world.
Eastgate Islands is an illustrative, fictional economy whose property prices tripled over twelve years before collapsing. Banks that had lent heavily against property were left with large unpaid loans, and many lent very little for years afterwards.
Companies paid down debt instead of investing, and consumers saved more and spent less. Output grew by an average of less than 1% a year for a decade, and its stock index finished the period 20% below its starting level.
Investors who had held only domestic shares fared badly, while those with global holdings did far better. In this fictional story the lesson was widely repeated: a country, like a company, can fall into a long period of weak growth, and spreading investments is the best protection. Pension trustees later cited the episode when they set limits on how much any single country could represent in the fund.
Watch out
Common mistakes.
- Assuming a lost decade is a precise statistical event, when the label is a loose judgement.
- Expecting markets to always recover within a few years, when some take much longer.
- Ignoring inflation, which turns flat nominal returns into real losses.
Questions
People also ask.
Which countries have had a lost decade?
Japan in the 1990s is the classic example, and Latin American economies in the 1980s are also often described this way, though the causes differed.
Can a lost decade happen to stock markets?
Yes. A major index can end a ten-year period at or below its starting level, and the same can happen to a single sector.
How can investors protect themselves?
By diversifying across regions and asset types, investing regularly and avoiding concentrating retirement withdrawals into a weak period.
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