Monday, July 14, 2008

It's Been a 10 Year Bear Market...

In this weekend's Wall Street Journal I read two articles that tackle the sinking feeling many investors are feeling these days when they see their portfolios shrinking on a daily basis.

The first of these two articles is titled Stop Worrying and Learn to Love the Bear. I strongly recommend it. If you are a regular reader of this blog, you know that I am strictly a buy and hold index investor. Well, here's what the Journal has for me:

"When you bought into the gospel of "stocks for the long run," did you have any idea how long the long run can turn out to be? Exactly 10 years ago, the Standard & Poor's 500-stock Index was at 1164; it closed Friday at 1239. That's an annualized average return of 0.63%. At that rate, it will take you 111 more years to double your money in the stock market."

Huh... 0.63% average annual return? Hmmm.... That's gonna make it a bit difficult for me to join the millionaire's club. But wait... there's hope:

"In the last long bear market, 1969 to 1982, stocks returned just 5.6% annually; after inflation, investors lost more than 2% a year. That mauling by the bear made stocks so inexpensive that over the ensuing 18 years they went up 18.5% a year, enough to turn $10,000 into more than $200,000.

The people who so far this year have yanked $39 billion out of U.S. stock funds, and $6 billion out of exchange-traded stock funds, do not understand this. But if you are still in your saving and investing years, a bear market is a gift from the financial gods -- and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him."

Well, embrace him I shall, mauling and all. Over the past year I have continued to regularly invest more of our available funds into stocks, not only by maxing out my 401K (my wife does the same), but also by investing more into our taxable accounts. I plan to stick with this plan even if stocks continue to decline. Yes, people, here it is. The higher long term returns of stocks comes with a higher degree of risk. Deal with it. Of course, that doesn't make it any more fun to see your portfolio getting smaller by the day, but this pain will be followed by some gain... or at least that's the LONG term plan.

The other WSJ article I read this weekend was originally published on, but unfortunately, I cannot find a link to it. The article, titled "Stocks - a Matter of Time", compares the value of the DJIA to the U.S. GDP. Here is a brief quote:

"The average is currently around 11,000, which can be seen as a ratio of 0.76 - once a few zeroes go away - to the 14.4 trillion U.S. economy.

That is only a little higher than the 0.75 average since 1949, calculated quarterly. By that standard, the market looks like it is fairly valued."

Well, if you buy that, maybe the pain is almost at an end. Regardless, suck it up and keep going.

One thing you have to give me credit for is being consistent. I wrote this article almost exactly one year ago, before it was clear just how nasty the market was going to turn.


Dividends4Life said...

Good call and good read!

Best Wishes,

Dividend Growth Investor said...

Actually, if you account for dividends, the annual return should have come up to at least 2%..:-)