Did Stocks Return 0% Over the Past Nine Years?
By one sensible measure, yes they did.
Adjusted for inflation, the S&P 500 is right where it started nine years ago.
Today the WSJ reported something I’ve been trying to wrap my head around for some time. I’ve wondered on this blog before about what is the best hedge against inflation. I’ve asked personal finance authors, asked myself, done research, read tons of articles. Nobody ever had a satisfactory answer for me. The closest I ever got was “stocks will outpace inflation.”
Well I guess not over the last nine years. Here a link to a telling graph courtesy the WSJ.
From the article:
Conventional stock-market wisdom holds that if investors buy a broad range of stocks and hold them, they will do better than they would in other investments. But that rule hasn’t held up for stocks bought in the late 1990s or 2000.
That just happens to be the timeframe I’ve been investing. Awesome. T-bonds returned 4.7% adjusted for inflation over that time period for crying out loud!
To be sure, unless you bought this month in 1999 and didn’t add to your holdings, you’ve done better than this. That’s why people like dollar cost averaging so much - it forces you to buy during down markets. But analysis like this is disheartening. Inflation’s a killer (and the government’s inflation numbers haven’t even been bad during this time period).
March 27th, 2008 at 2:34 pm
I haven’t read the WSJ article yet. But it sounds like they cherry picked a high point. I think you hit the nail on the head:
“unless you bought this month in 1999 and didn’t add to your holdings, you’ve done better than this.”
Most people have more than a single entry point over an 8 year period.
In some ways I find the article heartening. It’s nice to know that if I had dumped all my money in a S&P500 fund at the highest point in the market 8 years ago, I didn’t do any worse than breakeven.
March 27th, 2008 at 4:00 pm
March 27th, 2008 at 4:00 pm
March 27th, 2008 at 4:39 pm
I saw the same article. It was interesting to see. The thing to remember is that it is talking about the S&P 500, nothing else. The power of selective wording. It pays to diversify. I wonder how the other indexes performed over the same period.
March 27th, 2008 at 8:00 pm
March 28th, 2008 at 6:48 am
@ Jeff - That’s an excellent way of looking at it that I hadn’t considered.
March 28th, 2008 at 8:35 am
Stock market investing has to be a long-term game to return the historical average gains. The question is what is long-term and how long are you willing to stay in the market?
This specific 10-year period was not the best for any investor but it could have been worse if you got out mid way. Will it be better if you stayed another 10 years?
March 30th, 2008 at 4:26 am
History has proven the best hedge against inflation is to invest in commodities or managed futures.
See this link for studies comparing returns on stocks, bonds and commodities futures during inflationary periods:
http://www.usb.ctaguide.com/08-Facts%20&%20Fantasies.pdf
Inflation in the US has occurred in large part because of our government’s decision to increase the money supply. In doing so each dollar loses its value to a greater degree. A company will have to pay more for goods, manufacturing and distribution effectively lowering profit margins and therefore the value of its stock. This makes equity investment a poor hedge during inflationary periods.
Commodity goods such as oil, gold, foreign currencies, wheat, corn, soybeans, etc are necessary in sustaining the ever growing needs of a burgeoning society. Today these commodities are in short supply as the expanding middle class in China and India demand the same lifestyle of their Western neighbors. This trend, by most experts opinions, is expected to continue for another 7-10 yrs.
Investing a portion of one’s portfolio in commodity and/or managed futures allows one to take advantage of these bull markets while responsibly hedging against the downswing in equities.
March 30th, 2008 at 10:45 am
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