A recent article in The New York Times announced that sound investment strategies might have run their course.
It warned investors it could take as long as 20 years for stocks to regain their losses. As evidence to back up this rather large assertion, the article mentions from 1966 through 1982 — a full 16 years — stocks returned almost nothing.
And it’s true – that fact, without the key addition of any perspective or back story, is enough to scare anyone away from ever investing in stocks again.
Looking back over that 16-year period, we see the S&P 500 closed at 94.06 on February 9, 1966.
On August 12, 1982 – 16 years later — the S&P 500 closed at 102.42, barely above the February closing of 1966.
It’s easy to see, then, that stocks can do nothing over long periods of time. This leads many to believe the current market can, and probably will be as “bad” as this ’66 — ’82 period.
Of course, there is one major flaw in that assumption.
Why do dividends matter?
The article discloses the figures provided are a “price-basis” only. So what exactly does this mean? It’s simple: they don’t include dividends.
And dividends have a major impact on total return.
For instance, if you bought the S&P 500 in February 1966, and held for 16 years through to the end of August 1982 — and reinvested your dividends along the way — your annualized return would have been 5.80%.
Not as bad as the article makes it seem, right?
How important is diversification?
What if you, as a prudent investor…
- Diversified your portfolio* by putting 30% into Treasury Notes
- Divided the rest between large and small U.S. stocks
- Rebalanced the portfolio annually
- Reinvested all dividends and interest during the same period
The results? Your annualized return would have been 8.40%.
That’s certainly not what I’d call “doing nothing” over a 16-year period!
I’ll give the article some credit for encouraging investors to diversify, especially through the use of U.S. Treasury Bonds. While this is good advice, it is old news to prudent investors who always hold and rebalance a fully diversified portfolio.
Sound investment strategies will never run their course.
* Portfolio – 02/1966 to 08/1982. Rebalanced annually. Components: Dimensional US Adjusted Market 2 Index: 70% Five-Year US Treasury Notes: 30% The S&P Data are provided by Standard & Poor’s Index Services Group January 1926-December 1989: S&P 500 Index Ibbotson data courtesy of © Stocks, Bonds, Bills and Inflation YearbookTM, Ibbotson Associates, Chicago (annually updated works by Roger C. Ibbotson and Rex Sinquefield).
Investors can not invest directly into an index.
Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
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