The S&P 500 opened for business on Jan 3, 2000 (the first trading day of the year) at 1469.25. It closed yesterday at 1390.71.According to an interesting article by Randy Forsyth at Barron's if you add the dividends in it would be break even. I'm not sure if that is exactly right but you get the idea. I've referred to this as a big round trip to nowhere.
Most of the article focuses on thoughts from Robert Arnott in which he reasonably concludes that double digit expectation are too high and that investors should plan on average annual returns of 6-7%.
If you've been reading this site for a while you know I generally agree with that conclusion and actually have been writing about this for a while but I think the article misses a crucial point which I tried to capture in the above chart with the spray can feature (which I probably won't use again) of the Paint program.
Going back to the numbers in the first paragraph and forgetting the dividends the S&P 500 is down 5.39% this decade. However if an investor had the misfortune of getting scared out on December 31 2002 and got back in one year later they would be down 25.13% decade to date.
The average annual decline per year this decade has been 0.67% but for anyone missing the best year of the decade the average annual decline jumps to 3.14%. I think this supports something I have touched on before about the risk taken in getting completely out of equities when things look bad.
If instead of being completely out an investor was simply a little defensive and instead of being up 26% with the SPX in 2003 they lagged and were only up 20% that year then decade to date they might be down 11.5% which still fits the definition of lost decade but I don't think is anywhere near as bad as being down 25%.
I've been bearish for ages but have also been plenty long, had a little more cash than normal and been hedged a little thus the risk has been lagging up a lot as opposed to missing it altogether which I think the above numbers show can be a huge game changer.
If you look at most decades I think you will see that most of the return comes from two or three very good years (the 1990s as an obvious exception) and missing them will blow you up. You might be able to make your plan work with 6% average annual returns but you gotta be there to get it.
12 comments:
Any thoughts on the price of oil? There's one side saying no supply problem it's all down to speculators, another side saying the producer countries are keeping it for their countrymen to have cheap gas or just hoarding it, another saying it's increased demand and static supply. Is it a bubble, it sure looks like one?
I didn't read the article you reference, but I find these kinds of predictions (Buffett has done so, too) to be a compelling argument for diversification, not timing the market. Why would anyone sit still for a decade of no growth or single digit returns going forward? You're a big proponent of benchmarking, diversification, and international asset allocation, and rightly so, Roger. Nobody, it seems, ever posts a 10 year chart of EAFE though (as one example), and predictions for the future. Your recent article at TheStreet on emerging market diversification is an excellent example of how people should be thinking--not hand-wringing analyses of staid indexes like the S&P.
Sorry, I guess that sounds a little ranty.
There are a couple other lessons to be learned from this chart:
1)investors should diversify into many asset classes, particularly many equity caps, styles, and regions. If one had reasonable helpings of small cap, value, and international equities in their portfolio they would have done quite well during this period.
2) Timing provides real value during periods like this
3) If you use timing, focus on intermediate term cycles vs. typical bull/bear cycles. I'll probably get an argument on this, but often in stock market history we've seen prices go nowhere over very long periods. An intermediate orientation can help to squeeze out returns over "flat" periods. Also, you won't miss years like 2003.
I will have something on oil later today.
anon 6:16 exactly what I mean when I say that we can still get close to average returns but we will probably have to get them elsewhere.
with the spray can feature (which I probably won't use again)
LOL! I would assume (I'm not in the money management business) that for the vast majority of people, any kind of strategy that trades in-and-out of asset classes will be a loser, over any 10-year period. Speaking to the article in question, however, I would assume that it is very rare for anyone to invest 100% of their portfolio at a single point in time. I think the data would look much more favorable towards someone who made regular, periodic investments in the S&P 500 over the course of the decade.
I agree completely with anonymous@6:16. My portfolio consists entirely of index funds, but only about 11% is in the S&P500 (and only 33% in the US), so these charts mean relatively little to me.
As for the timing issue: Instead of trying to time the market, the main lesson, for me, is the value of dollar-cost-averaging. In my personal case, my S&P 500 fund (with semi-monthly contributions of an equal dollar amount) actually has a somewhat positive total return since the end of the bull market in June 2007, even though the market is down 10% - that adds up to an "alpha" of over 10% simply through the magic of DCA. I think it's folly for small-scale investors to make large or sudden moves; even when you are entering or exiting a market altogether, it's best to do it gradually and let DCA smooth out the ride for you.
When energy related specualtion comes down the S&P 500 will be under 1000.
Speaking to Roy and Anon 8:19, if you were retired begining 2000 it’s unlikely that you’d be dollar cost averaging in so Roger’s chart pertains. If you were retired and committed to an S&P index fund beginning 2000, a la Bogle, you would not be LOL. As for 6 -7% returns going forward, after taxes that’s 5-6%; with inflation at 5% or higher (this counts food, fuel, and everything else whose price goes up) what does this say about the feasibility of a market based retirement? Returns must be greater than 6-7% or people won't invest.
anon 8:47, i believe your comment supports two points I have tried to make.
1) save more while still in the saving/accumulation mode.
2) we need to broaden our investment horizons. frontier, emerging, small cap emerging, on and on are all becoming more esaily available.
I am not calling for huge volatiltiy shifts but 10% or more will be out there in the world if we have the time to study and find it.
I won't bother with the timing debate because everyone who puts something in eventually takes it out so and probably does so multiple times so basically everyone is a timer with the only differences being the periodicity involved in putting it in and taking it out and the logic or circumstances regulating how and when that is done.
In my strategic portfolio I periodically rebalance to maintain % ranges in the asset classes I focus upon with relative strength assisting in the % of a given asset within a class. Adjustment periods tend to be quarterly or longer (sometimes yearly in slower-trend or less volatile markets). In my tactical portfolio the periodicity is intermediate to relatively short (sometimes a swing trade measured in weeks).
I agree with most of what has been said but would point out there is an inexorable math involved in both incremental additions and subtractions even though it is the latter that tends to receive the most emphasis; e.g., what % of assets to withdraw monthly in retirement so your odds of running out remain small.
But the same kind of calculation is involved in additions particularly when they are in the form of dollar cost averaging; e.g., as total assets grow over time (a) each addition constitutes a smaller and smaller percentage of the total and, (b) has a smaller and smaller impact on portfolio growth because it is later in the accumulation phase and has less time to compound; eventually each contribution becomes rather trivial and the portfolio must be rebalanced directly (a different kind of timing decision must be made in effect).
Some years back I switched to a variation of the value averaging approach for a portion of my strategic and retirement accounts because it helped me set a long-term funding target (something dollar cost averaging or random additions can't do) and discovered it also helped resolve much of the incremental addition problem noted above as well as in setting a concrete goal for savings.
It has NOT gone nowhere, it's gone down! Inflation has been, what, 20-25% over this time span? So, in real terms holding S&P was a looser!!
Dude, don't you know what "A DECADE" is 10.24 years
So 2002+10.24 will get you right before Dec 2012 - THE END!
Dude, you should get your calculator's north pole straight! :)
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