How long does it take to revert to the mean?

I’ve been told that, as a young man fresh out of college with a good job, I need to save a lot of money in equities.  I’ve seen the charts, read the numbers, and understand compound growth, so I have been diligently putting away a healthy amount of my paycheck into indexed funds my company offers for its 401(k).  In fact, since I started my savings in the fall of 2008, I missed a lot of the really bad bruising that hurt people who have had portfolios for a long time. 

My problem is not with the little money I have lost.  Rather, I wonder when my money will start to grow and, more worryingly, if stocks really are the best long-term investment.  I am not expecting to be rich by my 30s, but I would like to have a sense of progress.  The more I read, however, the more I am convinced we are facing an L-shaped recession similar to Japan’s malaise of the 90s (from which it has never really recovered).  Our political leaders lack the boldness to confront entrenched interest groups, so our policy is tepid and has done nothing in two years to solve the root cause of this crisis. 

So I am increasingly reminded of Japan, not Sweden (whose rescue of its financial system was relatively quick and successful).  Japan also underwent a massive property and financial bubble and then attempted fiscal stimulus without the necessary financial reforms.  The stock market has barely recovered.  The Nikkei 225 today has a value roughly one-fourth of where it was at the beginning of the decade.  It is now at the same level it was around 1985.  If you invested your money in the Nikkei in 1985, you would have little if anything to show for it.  If you invested in the mid-70s, your money would have roughly doubled; that is, it would have taken around 35 years to double your money, which is an interest rate slightly greater than 2%.  Your money would have been more productive in government securities or AAA corporate bonds, the two safest assets (after the mattress). 

Perhaps the Nikkei is posed for a great few years ahead (beware gambler’s fallacy) and will revert to the long-term mean of around 10% annual growth in equities.  But looking at a graph of the index really calls into question the value we assign to equities.  Similarly, a graph of the Dow Jones Industrial Average shows no growth from the mid-60s to early 80s and another leveling off after 2000.  The last two years has made us all realize that so much of our prosperity and growth was bubble-driven, which calls into question the very faith we have in equities.  I am by no means an expert, and I will continue to invest in my 401(k) in index funds, but each time I do so I will have a little self-doubt.  If our crisis is in the process of discrediting most of our economic beliefs of the previous decades, who’s to stay that our previous belief in equities’ long-term value was not also misplaced?