BACK TO BASICS
The decade of the 90s was a truly memorable one for investors, with the exception of the years 1990, and 1994, it was nothing but clear sailing and double-digit gains for the stock market. As the decade unfolded, the gains got more and more impressive. In fact, the market didn't run out of gas, but seemed energized and stronger with each passing year, culminating with the impressive gains of 1999.
As we begin the new millennium, investors seem to expect rates of return of 20%, 30% or even 50%, and for much of the first quarter of this year, that continued to be what we got. Then reality reared its ugly head, and from mid March to mid May we had what some are calling in retrospect a "tech wreck," and everybody and everything, including the averages, came back down to earth. Now, some people seem to have overreacted the other way, and have become intimidated by the market.
Of course, each person has to decide what their own personal risk tolerance is; what's right for you may not be right for your next-door-neighbor, co-worker or even your spouse. While some people seem to think they were bulletproof during the 90s (wrong, of course) there's no reason now to drop the stock market like a bad idea, in search of other investments. I think it's time to go back to basics and look at the historical facts.
From 1926 through 1999, a period of 74 years, the S&P 500 showed an average rate of return of 11.35%-- that's pretty impressive, and those 74 years were hardly a picnic. When you start back in 1926, you're just in time for the crash of '29, the Depression of the '30s, WW II, Korea, and Vietnam. In that time we've had presidential assassinations, near assassinations, presidential resignations and near impeachments.
Clearly, the long-term outlook is best. If we look back again at the 74 years from 1926 through 1999, we find that the S&P 500 actually rose almost 75% of the time; specifically, up 54 years and down 20. And when you take a longer-term view than one year at a time, your odds of success improve considerably. When you look at rolling five-year periods, the S&P 500 was up 90% of the time, and for a ten year period, i.e., you've bought and held for all the possible ten year periods for that 74 years, the market was up 97% of the time. If you go to true long-term investing, 15 years, you'll find that there is no 15-year period from 1926 to the present, including the Depression of the 30s, where a person would have lost money investing in the S&P 500 if they would have just bought and held for that entire 15 years. Does that guarantee the next 15 years? Of course not, but since none of us are fortune tellers, history can be our only guide-not a guarantee, but certainly a decent benchmark by which to base future expectations.
And what about investing in bonds? History tells us it really is not the answer. Long-tern investors look to stocks as a hedge against inflation, everybody's enemy. When you compare the results of stocks vs. bonds against inflation, bonds do not prove themselves very well. Through the 1926-1999 period, for the 15-year spans, 93% of the time, stocks have outpaced the rate of inflation. At the same time, more conservative short-term Treasury bills and long-term government bonds have outpaced inflation only 43% of the time. The safety and preservation of principal that people are seeking through bonds addresses only half of the problem. The other half, by far the weightier, is what I like to call, "But what if you live?" And if you live, and let's face it, most of us are living longer, bonds do not keep pace with inflation anywhere near as well as stocks do.
At the bottom line, you, along with the assistance of an investment professional, have to decide what your specific risk-tolerance is. If your investments really are making you uncomfortable, there's the old Wall Street saying, "Sell down to comfort." I couldn't agree more. However, people should not let momentary stock market gyrations like we've seen these past couple of months, change their complete investment philosophy and alter their long-term plans for financial security. Invest an hour in yourself-go and see your investment professional, devise a plan and stick to it. Over the long-term, you'll probably be well rewarded.
(Tom Butenhoff is a First Vice President with J. E.
Liss & Company in Milwaukee. The views are his and not necessarily
those of Liss Financial Services or the Job Connection/Hiring
Network.)