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Friday, November 28, 2008

Fixed Income vs. Equities after the 40% Decline

The 40% decline in the stock market has caused me to calculate the point at which equities are a better investment than fixed income. For the purposes of this exercise, I assumed I could average a 5% return on fixed income and that the 40% decline occurred at the end of the investment period. The results are show in the table below.

Years of investmentAnnual return required for break even with a 5% CD

5

16.2%

10

10.5%

15

8.6%

20

7.7%

25

7.2%



Thus, money invested in the stock market for X years had to return at least Y% in order to match the return of a 5% CD. If the return is below the percentage shown, then a 5% CD was the better investment. If the return is above the percentage shown, then equities were the better investment.

With the S&P 500 return for the last 10 years close to zero, a 5% CD beat the stock market for 5 and 10 year periods. Although I couldn't find the data, a 5% CD also likely beat the stock market for the 15 year period. One has to go back 20-25 years for the stock market to break even with a 5% CD at the end of 2008.

Essentially, the bear market of 2008 has erased the additional gains of the stock market over fixed income. For now, a 5% CD appears to be the better investment for the past 15 years.

For more on Reaping the Rewards, check back every Friday for a new segment.

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

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