S&P 500 Track Record
July 1998 – August 1998 -2%
August 1998 – March 2000 +60%
March 2000 – October 2002 -49%
October 2002 – October 2007 +100%
October 2007 – March 2009 -57%
March 2009 – Present +68%
If you haven’t already, I suggest that you take a look at my article Investing For Retirement Course 101. Take a look at my five basic tenets for investing. Let’s discuss the first one – “I do not Buy and Hold”. There is a reason for that. Can I ask you one question? If you lose ½ of your investment in the market, what return do you have to make to get your original investment back? Did you answer 100%?
Set It and Forget It
Now if you invested in a broad market of stocks like the S&P 500 or maybe a S&P 500 Index back in July 1998 and held that investment until March 2010, what do you suppose you return would have been? I’ll give you a hint. The S&P 500 went up 68% from March 2009 until the present. Need another hint? The S&P 500 went up 100% from October 2002 until October 2007.
So how did you do? We will see how a “set it and forget it” plan works out. Let’s say you invested $100 in the S&P 500 in July 1998. In August 1998 the S&P 500 went down 2%, so your $100 would be worth $98 (2% of $100 = $2 and 100 – 2 = 98). From August 1998 until March 2000 your investment would have gone up 60%. Now your investment would be worth $156.80. Not bad, correct?
From March 2000 through October 2002 your investment in the S&P 500 Index lost 49%. Now your investment has lost $76.83 – that is 49% of $156.80. And your total is $79.97 (156.80 – 76.83). As I stated, you have to make a 100% gain to make up for a 50% loss in your account. So if you lose 49% between March 2000 through October 2002, that’s almost 50%. So for the next period of time, you need to make 100% to get back to where you started at $156.80. So how did the S&P do?
From October 2002 through October 2007 your account went up +100%. We take $79.97 and multiply it by 2 and our total is now $159.94. But we are not done yet.
In October 2007 the market started to slip and from October 2007 until March 2009, the market, and your account with the S&P 500, lost 57% – $91.17. Your total investment account now stands at $159.94 – $91.17 = $68.77. You already know that the market has to go up 100% to get you back to where you started. Has it?
From October 2007 through March 2009, the market is only up 68% or 32% less than 100%. And in over eleven years, almost twelve years, you are not even back to where you were in 1998. You account is worth (in March 2010) about $115.54. You’ve made $15.54 for eleven, almost twelve years. If you divide 15.54 by eleven, you rate of return for that time period is 1.41% (using simple interest $15.54 divided by 11).
Actively Monitoring Your Account
So how would you have done if you had been actively monitoring your account. When I say actively monitoring your account, I mean sitting down at the computer once a week and checking Yahoo! Finance to see how you are doing.
In July 1998, you invested $100 in the S&P 500 probably a S&P 500 Index fund. Let’s say that you missed the call to sell and did not catch the fall from July 1998 until August 1998 and your account lost 2%. We’ll do this for the sake of argument, since no method is perfect.
So your account lost 2% and your $100 is now worth $98. From August 1998 until March 2000 your investment would have gone up 60%. Now your investment would be worth $156.80. You watched it every Friday, when you had five minutes, like a mother hen watching her chicks, and watched your investment go up.
In January 2000 you noticed that the S&P 500 Index was starting to lose steam and the price went through the 40 day EMA around January 6th. We’ll assume that you were vigilent and got out of the S&P 500 Index in March and moved into cash.
For this period, March 2000 to October 2002, you missed the 49% decline in the market and you were earning whatever interest money markets were paying at the time. We’ll ignore that interest earned to keep this simple.
The market turned up again and for the period October 2002 through October 2007 your account went up 100%. Now your $156.80 is worth $313.60.
Sometime in September or maybe October 2007, you noticed that the S&P 500 Index was again losing steam and you sold again. From October 2007 until March 2009 you mised out on the 57% loss. When you got back into the market in March 2009, until March 2010 your account is up another 68% and the value has grown from $313.60 to $526.85.
Just this past March 2010, which would you rather have:
The Set it and Forget it account with $115.54 or The Actively Monitoring Your Account with $526.85?
There is an account where you can set it and forget it and do fairly well. To be continued . . .
For Taking Early Retirement (TER), I hope you are enjoying a great retirement or are close to that day!
Jeremiah John
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