Thursday, June 3, 2010

The Difference 12 Years Makes

12 years ago yesterday, June 2, 1998, the S&P 500 closed at 1,093. We are currently at 1,094 as I write this.

Consider the following:
  • Investor A starts investing on June 2, 1998 and continues investing yesterday. That investor saw no durable lift, other than dividends, in the stock market for all 12 years (there has, of course, been a wide trading range) of his career.
Anyone planning on the historic 9-10% annual equity returns in 1998 has been disappointed. Stocks were overvalued and only became more so going into 1999 and 2000.
  • Investor B was lucky enough to start a similar career exactly 12 years earlier on June 2, 1986 and manages money for the same amount of time, 12 years, getting out of the business on June 2, 1998. In sharp contrast, Investor B saw the S&P go from 245 to 1093 during his career. A 15%+ annualized return including dividends could have been achieved just buying the Vanguard Index 500 fund during that time frame.
Quite a bit of wind at your back. Investor A managed money in an entirely different world than Investor B. Some of the best have shown they can make money in either period...but many prove otherwise.

10%/year long-term returns in equities has been the norm. That fact masks the following: the market historically goes through long periods of going sideways (often 15-20 years) before embarking on periods of explosive growth like the 80's and 90's. Examples of long-term sideways markets include 1965-1982 and possibly 2000-????*.

So the long-term average return of 10% doesn't tell you much if your investing horizon is not truly very long-term.


* In just over 80 years we've essentially had the following: [~1929-1946 sideways market], [~1946-1965 bull market], [~1965-1982 sideways], [~1982-2000 bull market], and [~2000-??? sideways].
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