Thursday, March 27, 2008

Better Stock Market Returns For The Future?

Stocks Tarnished By 'Lost Decade' in The Wall Street Journal shares a dismal record by the S&P 500. During the past 10 years the S&P 500 has only achieved a total return of 1.3% a year. The return was -0.37% a year for the past nine years and -1.4% a year for the past 8 years. Given this performance, should investing in the stock market still be a good method to build and maintain wealth?

To answer this question, I looked to the historical rolling 10 year returns for the S&P 500. Bespoke Investment Group did an great summary of this information going back to 1900. They provided an excellent graph of the data and noted, "As shown, periods where returns were lower occurred in 1914, 1921, 1932, 1938, 1974 and 1977. We also highlight years where returns peaked -- 1929, 1959, 1992 and 2000. While the returns could easily get worse, periods that have been this bad have not lasted longer than 4 years (1937-1941) before they've started to get better." In addition, the lows appear to be double bottoms (e.g. 1914/21, 1932/38, and 1974/77) that were followed a steep rise in returns for about two decades.

In spite the current uncertainty, I believe data shows that the market will be much higher a decade from now. If history is an indicator of the future, the market's return to higher gains is likely close and not farther than four to five years away. Given this scenario, it makes sense to have part of one's savings in the stock market, at every age. In our case, we will continue to put long term funds (i.e. not needed for 10 years) for my parents, ourselves and our child in the stock market. For us, that means keeping IRAs, college savings accounts, and 401Ks invested in the stock market. That way our long term savings will participate in the historically higher returns of the stock market.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

1 comment:

Anonymous said...

These are scary issues to think about. I think before we can start planning for death,disability and divorce we have to accept that they may happen to us. At the moment I do not think I am prepared to accept this which is why I am hiding and not preparing for them.