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The Stock Market's 10-Year Return:

A number of newspapers noted that the major stock market indices closed at their lowest levels since 2004. What I think is more remarkable is what this means for 10-year trailing returns. As of yesterday's close, the S&P 500 increased by a paltry 6.25% over the last 10 years -- roughly a .45% return per year. (The Russell 2000 index did better, reflecting small cap stocks' outperformance of large caps over the last 10 years.) And what's really striking is that October of 1998 was a trough in the market, and the S&P 500 rose 50% in the following two years (before, of course, precipitously falling). The bottom line is that, over a 10-year period, you would have been better off investing your money in just about anything other than the stocks of major U.S. corporations.

jdege (mail):
OK, now go back and run the numbers for what your return would have been had you been dollar-cost-averaging across those ten years...
10.7.2008 11:06am
Matthewccr (mail):
But at least the fundamentals of the economy are strong.

Democrats like to talk about working class middle Americans voting against their class interests. Can we start talking now about the wealthy voting Republicans as against their class interests?
10.7.2008 11:09am
John Jenkins (mail):
If you change the time-horizon or any other variables then you're wrong. You are also looking at a time period that includes a sui generis event (Sept. 11, 2001) that had a negative effect on the markets, AND right after a financial meltdown.

In short, what's your point?
10.7.2008 11:12am
JoeUser (mail):
jdege, as one who has been dollar cost averaging over the stated time period, I would be very interested in seeing just those numbers compared. Any links to such a calculation?
10.7.2008 11:22am
Displaced Avenger:
I agree with John Jenkins--this is a stretch, at best. What would the 10-year return have been immediately after either of the black Mondays?

Really, all this shows is that the worst time to get out of the market is right after a crash. But everyone knows that, right? (The difficulty is, of course, in finding the courage to stay in.)
10.7.2008 11:32am
frankcross (mail):
Stuart, this post is not about Ayers. Out of all the things going on in the world today, the really, really important one is about Obama and Ayers. It deserves most of this blog. I think your post is a distraction from the key issue facing America today.
10.7.2008 11:33am
Anony:
Two (stupid) questions:

1) Does this include reinvested dividends?

2) Does this factor out inflation?

My guess, for both, is no.
10.7.2008 11:42am
Allan (mail):
And for 8 of the 10 years, we had a Republican president. For 6 of the 10 years, we had a Republican congress. The rest of the time was Democrats. For the entire time, there has been no other political party represented at the federal level.

I am not saying that Republicans caused anything. However, for those who argue that Republicans are good for business, I kind of wonder where the emperical evidence lies.

The same could be said for Democrats, and for a fusion goverment of both parties.

Perhaps it would be best for a new party to develop. One which promotes small business and small government. One which wants to leave decisions to the states and give the 10th amendment its due.

Is there such a party? Oh yeah, the Libertarian Party may fit the bill.
10.7.2008 11:48am
PLR:
You could have invested in Bechtel or Halliburton and done OK.
10.7.2008 11:56am
Deoxy (mail):
The Libertarian Party is damaged goods. Nice concept, fringe-psycho reputation (fair or not).

The Republicans used to have some significant "small government" leanings... but that seems to be quite thoroughly killed off.

At some point, as the Dems and Reps get closer and closer together, there will be a revolt, one of them will split, there will be a mess for a few years, and then we'll end up with 2 different parties again.

Unfortunately, I think the Republicans will the party to split (meaning that the Dems, the worse of the two IMO, will end up end charge for a while as that gets sorted out), as they are too far left for a significant portion of the country, and the Dems are even further (look at the opinion polls on Bush, for instance, and realize that a significant part of his problem is that he is too far to the left for many people).

Either that, or the Reps somehow get back to their roots, but I just don't see the path they would take at this point (see my first line of this post about "damaged goods").
10.7.2008 11:58am
srg:
For anyone in well-managed value stocks the last 10 years have been excellent.
10.7.2008 12:02pm
Deoxy (mail):
Re-reading that, I think I was unclear in my parenthetical point about Bush's approval.

It was best shown (IMO) when Bush was running against Kerry. There were polls showing people didn't like Bush, and so the MSM was confused that Kerry's numbers plus Bush's numbers didn't add to nearly 100... after a couple of weeks of this, they ran a poll asking better questions and realized that a large number of people didn't like Bush because he was too far to the left, so OF COURSE they didn't like Kerry, as he was farther.

The Repus are taking the right for granted and moving farther left. If a viable party can form or split from the Reps that better represents the real right, I think times will get very interesting (the "first past the post" method of voting strongly favors a two-party system, so it won't be three-party for long, one way or the other).
10.7.2008 12:03pm
JoshL (mail):

I agree with John Jenkins--this is a stretch, at best. What would the 10-year return have been immediately after either of the black Mondays?

Really, all this shows is that the worst time to get out of the market is right after a crash. But everyone knows that, right? (The difficulty is, of course, in finding the courage to stay in.)


Indeed.

The numbers are quite easy to manipulate. If we look to the height of the S&P about 1 year ago, the 10 year number then is something upwards of 50%. It's up more than 20% in the last 6 years (to date). If we look at a 20 year number then we're around a 475% increase. If we look at that peak a year ago and do a 20 year number from there, the rise is more than 600%. A 30 year number from today (1978) is about a 1000% increase. For reference, that last is about an 8% return, while the 20 year number is about a 7% return. The 20 year number from a year ago is about a 9.5% rate of return. The 10 year number from a year ago is about 5% per year.

The morals are: don't invest for the short term and don't pull your money out at the bottom of the market.
10.7.2008 12:03pm
PersonFromPorlock:
Sympathetic to libertarianism as I am, the LP has had thirty eight years to present competent candidates in a competent way and hasn't managed to yet. Unless terminally optimistic, one takes a lesson from this.
10.7.2008 12:03pm
Anony:

srg:
For anyone in well-managed value stocks the last 10 years have been excellent.


I think Berkshire Hathaway has compounded at about 12% annually for the past 10 years. Beats 0.45%.
10.7.2008 12:05pm
ChrisIowa (mail):
The 1998 end of this was in the middle of a bubble, about the time of Greenspan's irrational exuberance comment. The current situation is an anomalous low. So don't sell now. If you look at a long term chart on a log scale, current prices are in line with the same upward trend established in the 1980's, which is a return of about 9.6 percent (I used 1985 Dow = 1200 to today Dow = 9950 to get that number), not counting dividends.
10.7.2008 12:09pm
Prufrock765 (mail):
I am not an investor or an expert by any means in this area, but, to expand on a previous commenter:
the big tech bubble burst, 9/11 and all of its ramifications, the war in Iraq and Afghanistan, the ruination of a major American city by a hundred-year hurricane, the housing bubble burst--this has been a very rough decade as far as exogenous events are concerned, and the Dow has held its own.
10.7.2008 12:33pm
Rich B. (mail):
OK, now go back and run the numbers for what your return would have been had you been dollar-cost-averaging across those ten years...

It would be a significant loss. For roughly 8 of the 10 years, the S &P was higher than it was exactly 10 years ago. Any purchases made then are now at a loss. Only a few purchases around 2002-2003 would be up today.
10.7.2008 12:34pm
Francis Marion (mail):
While it is interesting to note the paltry returns of merely one or two equity classes, any real investor will tell you that returns are higher when one invests in multiple asset classes in addition to the S&P500 such as small caps, mid caps, foreign large caps, foreign small caps, emerging markets, precious metals, REITs, treasuries, TIPs, corporate bonds, etc. Go google for "coffeehouseinvestor" and you will see that average returns are approximately 10% per annum for an investor who invests in multiple asset classes although the average returns are expected to decline to approximately 7-8% per annum given that the last 15 years have been one bubble after another.
10.7.2008 12:35pm
Thales (mail) (www):
I agree with the snapshot comments above, but the return does suggest something has been pretty fundamentally wrong with the way we (companies, government and individuals) handle debt in this country, and that we are now facing a severe reckoning.

Normally, looking back over any given 10 year period, one can find that an S&P 500 index fund increased by about 10% a year, no? This tends to beat inflation and other asset classes, and tends to be adequate diversification . . . I wonder how a portfolio of index funds including Europe, Asia and emerging markets for about half, plus half US indices has performed over the same period Stuart measured. My guess is not much better, and that the same period events, the LTCM blowup, the Asian and Latin American crises, the Russian debt default, 9/11 and the current credit crunch have similarly devastated such a portfolio.
10.7.2008 12:37pm
David M. Nieporent (www):
Sympathetic to libertarianism as I am, the LP has had thirty eight years to present competent candidates in a competent way and hasn't managed to yet. Unless terminally optimistic, one takes a lesson from this.
The LP has had candidates like Paul (and now Barr), both of whom have been competent enough to win elections when they had other letters beside their name. The problem with the LP isn't lack of competence, but (a) lack of a popular message, and (b) the usual structural problem of third parties in the U.S.

That's not to say that they've been competent, but competence isn't the reason they haven't won. (It's the structural problem for third parties that makes them incompetent; nobody who is good at running elections is going to work for the LP. Why would you? It's a waste of your talents, since the LP can't win.)
10.7.2008 12:40pm
PC:
I think Berkshire Hathaway has compounded at about 12% annually for the past 10 years. Beats 0.45%.

Yes, but it's run by an America hating liberal.
10.7.2008 12:49pm
PC:
Only a few purchases around 2002-2003 would be up today.

Gold and silver ^_^.
10.7.2008 12:50pm
Mongoose:
Some have stated that because the Libertarian Party has been around for 38 years without success, they are not likely to be successful in the future. These folks should study the history of Mexico, where the current ruling party was in existance for 50 years prior to finally gaining power. The party ascended very quickly, and few people in Mexico anticipated the change.

http://en.wikipedia.org/wiki/National_Action_Party_(Mexico)
10.7.2008 12:55pm
SteveW:
Is "return" the correct word to describe the linked chart? I think "return" assumes a reinvestment of dividends.
10.7.2008 12:56pm
kurt9 (mail):
Comparing the stock market to 1998 is the wrong comparison. It is better to compare it to 1995 and before, which is when the credit bubble first had its effect on the stock market. Go to Bigcharts (www.bigcharts.com) and click on the markets. Make the graphs including "all data" and you will see what I mean.

The markets had slow, steady growth during the 80's and early 90's (minus the crash in '87, which was just a blip). They then starting going crazy in 1995, which marks the start of the credit bubble.

The Dow is still higher than it would be without the credit bubble (where it would be about 8,000). The Nasdaq and S&P 500 are about where they should be. The Russel 2000 is a little low. However, the Russel 2000 never spiked during the tech bubble. This suggests that many stocks that comprise the Russel 2000 are undervalued. These will be the first to recover.
10.7.2008 12:58pm
Constantin:
Until this year, and specifically last week, I'd ridicule a comparison of Mexico's politics and ours. Now with bailouts and Messiahs and etc., I'm not sure.
10.7.2008 1:03pm
NattyB:
Which party wanted to invest Social Security in the Stock Market?

Oh that's right, the good for the economy Republicans. They care about YOU!
10.7.2008 1:04pm
Tony Tutins (mail):

The bottom line is that, over a 10-year period, you would have been better off investing your money in just about anything other than the stocks of major U.S. corporations.

The Palins sure know this. According to the New York Times, their financial statements show [their] retirement accounts included a sophisticated range of investments, including mutual funds invested in Latin America, small-cap stocks, shares in Spanish, Belgian and Australian indexes and a midcap growth fund.

But the dollar is recovering against the Euro. The dollar, which was worth 1Eur08 when Bush was first inaugurated, is worth 0Eur74 today, recovering from a low of 0Eur63.
10.7.2008 1:06pm
kurt9 (mail):
The Dow was 4,000 in 1995, when the credit bubble started.
If the Dow remains around 10,000, its still up at an annual return of 7% from 1995. If the Dow goes down to 8,000, then its annual return is 5.2% from 1995.

Historically, the Dow has averaged a 5-7% return, averaged over the past 100 years.

Instead of a crash, I think the stock market is simply returning to its "real" value absent the 13 year credit bubble.
10.7.2008 1:06pm
Tony Tutins (mail):

Make the graphs including "all data" and you will see what I mean.

I see, exactly. The S&P 500's performance during the W. administration mirrors the S&P performance during the Ford and Carter administrations.
10.7.2008 1:11pm
Sarah (mail) (www):
My investments are 50% large cap, 20% small cap, 20% foreign, and 10% bonds. The bonds bother me; they're awfully conservative. Of course I probably won't retire till something like 2050. The stock market has done really well since I was born. Investing in stocks for anything other than extremely long-term gains is basically gambling, though. Why even bother thinking about ten year periods?

Neither Paul nor Barr have been able to win a Presidential election with any letter after their name. Strong political parties simply work too well for those few who've managed to succeed at that level in the US to even think about trying to pull something off with any third party, except when they're about to lose or get kicked out of their party anyway (Teddy Roosevelt, for instance.) This is also why independents caucus with a major political party in Congress -- parties weren't something folks came up with because they wanted to be difficult and undemocratic; they solved a problem.

We've managed exactly one election without any strong political parties in the US, and that's only because the guy who won was regarded by the populace like a God (it really helped his reputation that he'd already turned down jobs like "Emperor for Life.") Parties that split (like the Democrats in 1860) and create four or five-way elections, get punished severely for it. The Democrats, even after the party was basically put back together and the South had the vote again, didn't win until 1885, and other than Grover Cleveland's split terms, didn't win at all until 1913. If I take out Woodrow Wilson the streak extends through to Roosevelt (that's eleven Republican presidents, one Democrat who got in via Lincoln's assassination, and two Democrats who won a total of three terms, over the course of 73 years.)
10.7.2008 1:12pm
Ion:
Anoy asks one (smart) questions that shoot your point to shreds:

1) Does this include reinvested dividends?

Most mature companies, which are overrpresented in the DOW and S&P produce, sacrafice growth for dividends.

While this is obvious to all but the least informed, I think you have a point that the elite media outlets enjoy making it look like capitalism doesn't work, and that an "ownership" society will always be subject to the whims of the market. Of course, they have to make the market look much worse than it actually is for any of their arguments to make sense.

Please don't help them spread the filth!
10.7.2008 1:28pm
Byrne Hobart (mail) (www):
Displaced Avenger, the ten-year return from about the low after the '87 crash was 150%. See: http://finance.google.com/finance?q=.inx
10.7.2008 1:31pm
Tony Tutins (mail):

Anoy asks one (smart) questions that shoot your point to shreds:

Not at all. Companies have been paying cash dividends forever; they did not start ten years ago. In fact, length of time paying cash dividends was an essential criterion for selecting investment-grade stock. Pick up a copy of Ben Graham's Intelligent Investor.
10.7.2008 1:33pm
gab:
Josh L said,


"The morals are: don't invest for the short term and don't pull your money out at the bottom of the market."


Thanks Josh. Let me give you my e-mail address so that you can write me and tell me the day the market makes a "bottom."
10.7.2008 1:59pm
eyesay:
The Democrats, even after the party was basically put back together and the South had the vote again, didn't win until 1885

In 1876, Tilden (D) beat Hayes (R) in the popular vote 51% to 48%. Both candidates claimed to win Florida, Louisiana, and South Carolina, and there were confusing ballots. The dispute was resolved in the House of Representatives in favor of Hayes, not on the merits but on the politics of the day.
10.7.2008 2:09pm
Dilan Esper (mail) (www):
Which party wanted to invest Social Security in the Stock Market?

I really wish this weren't true, but the Democrats did as well. Clinton proposed it during his presidency. (He just wanted the government to do it instead of private accountholders.)

When the stock market is booming for a prolonged period of time, politicians of all parties forget about the risks and just start dreaming of those bigger returns vs. the paltry interest rates on T-bills.
10.7.2008 2:58pm
KeithK (mail):
Back in '99 I started a new job and out of a mix of utter laziness and distraction (mostly laziness) never got around to allocating any of my 401k into specific funds. So it all sat in the stable value (cash) fund. When I left the job a year later my investment "choice" had outperformed every other option I had in the plan. So should I take this as evidence that I should never invest in equities and instead just keep cash? Of course not. I should recognize the cause (the market had crashed right before I left the job) and be greatful that I lucked out.

The terrible return for this particular 10 year period really sucks if you need for some reason to get your money out now. If you have a longer time horizon things may look a lot different.
10.7.2008 3:03pm
eyesay:
a large number of people didn't like Bush because he was too far to the left

Kindly provide evidence to support that assertion.
10.7.2008 3:15pm
Deoxy (mail):
Proof? Medicare Prescription Benefits, among others. "Big government conservative". Take your pick - there are several choices.

Bush has never been all that popular with his "base", except in the following ways:

1) he isn't Gore
2) his foreign policy sounded good after 9-11 (but then his follow-thru was poor)
3) he isn't Kerry

Bush's domestic policies have never sat well with conservatives (as best I can tell). Describing them as "too far to the left" for conservatives seemed fair to me - how would you describe it?
10.7.2008 4:30pm
PC:
"It must be very strange to be President Bush (for more reasons than I care to name). He seems not to live in the same world we do. Specifically, he seems to think he has this extraordinary vision approaching genius, but he can't get anyone to notice. He's like a "great" painter or musician that is "just ahead of his time" and that unveils one "materpiece" after another. It's so hard for him to imagine that anyone could disagree that when questioned, he alternates between hostility and boredom."
10.7.2008 5:03pm
ejo:
invest social security in the stock market? is this another person who dreams there is a lock box somewhere with all those social security deposits?
10.7.2008 5:18pm
J. F. Thomas (mail):
Historically, the Dow has averaged a 5-7% return, averaged over the past 100 years.

So in other words, just a little bit better than what a passbook savings account used to earn in the sixties and early seventies.

And what if AIG were still on the Dow? What would it be at today--a hell of a lot lower than 10,000 since the value of AIG stock is now basically zero.
10.7.2008 5:44pm
Dilan Esper (mail) (www):
invest social security in the stock market? is this another person who dreams there is a lock box somewhere with all those social security deposits?

Well, there was before George W. Bush got elected, when we were running surpluses.

Seriously, I know everyone talks about Iraq and Katrina, but there may not have been a truly more idiotic political decision in my lifetime than Dick Cheney's "Reagan proved deficits don't matter, this is our due".
10.7.2008 6:18pm
Harry Eagar (mail):
You have to disaggregate the aggregates.

It's like unemployment rates. The national rate may be 6%, but if you personally don't have a job, for you it's 100%.

The question is not what the market did but what you did. Were you enamoured of Enron and WorldCom? Then you probably underperformed the indexes.

Ebay? You probably beat 'em.
10.7.2008 10:49pm
Dilan Esper (mail) (www):
Harry:

But that's just gambling. Every smart investor diversifies his or her portfolio because you don't know what companies will turn into Ebays and what companies will not.

So choosing one of the strongest performing stocks as an example of returns in the stock market is like choosing the one time a 100-1 shot wins at the racetrack as an example of the returns in playing the horses.
10.8.2008 1:17pm
Harry Eagar (mail):
'But that's just gambling.'

No kiddin'. Wall Street has been run like a bucket shop for the last 15 years, or hadn't you noticed?
10.8.2008 7:49pm
Don Blake (mail):
Dollar Cost Averaging, Buy and Hold has not worked over the last 10 years!

Cumulatively the S&P 500 is up 2.69% since the beginning of 1998, and has produced an average monthly return of 0.10%. Surely that qualifies as a "lost decade". But is even worse when we consider that money market has drastically outperformed with returns of nearly 40% (cumulative) with virtually no risk. But one of the characteristics of equity market returns that fly in the face of Buy &Hold, Dollar-Cost Averaging is that market tops typically develop very slowly relative to the velocity of market bottoms. The result is that the investor with no active risk management or tactical guidance within portfolios will tend to buy more shares near market tops and substantially less shares near market bottoms. This doesn't bring into account the emotional side of the equation that will often deter even the most dogmatic of dollar-cost averagers in washed-out markets.

Let's look at this quantitatively, however. Take an investor who purchased one share of the S&P 500 each month going back to the beginning of 1998. Despite a slightly positive overall return for the S&P during that time, this investor owns 130 shares of SPX after more than a decade, and owns them at a cumulative loss. The cost basis of such a portfolio is $158,201.26, while the equity value of that portfolio is $129,610.00; a loss of 18.07%. If we instead took a true dollar-cost averaging approach the results have been painfully similar. The investor who simply, and religiously, purchased $1,000 of the SPX at month-end since the beginning of 1998 effectively purchased 109.22 shares of SPX at a cumulative cost of $130,000.00 ($1000 per month over 130 months). The value of that portfolio is currently $108,891.87, a loss of 16.24%. No dividends or commissions were included in those numbers.
11.6.2008 9:52am

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