Please choose wisely.
Hypothetically, let us say that as a financial advisor on October 9, 2007, you had a client with $1 million to invest who would need use of that money on December 31, 2019.
Let us also hypothetically say that you had the ability to predict the return of the S&P 500 for the next 18 months, from October 9, 2007 through March 9, 2009, but no further.
With that knowledge on October 9, 2007, you had the choice between three hypothetical investments:
1. An investment paying 8% simple interest for the 12.2 year period; or
2. A U.S. Government backed bond that would mature on December 31, 2019 and give your client an annual compounded rate of return of 6.00%; or
3. The S&P 500 that would lose - 55.24% during that 18-month period you were able to predict. If we say that differently, that $1 million would be worth $447,600 the night of March 9, 2009.
Which investment would you pick?
The real question is - by how much would the S&P 500 be ahead of the two alternative investments? This is despite the handicap the S&P 500 experienced by having an inception date at the beginning of the second worst decline in the market’s history.
Please look at Chart 1A below.
The difference between these hypothetical investments is significant. If you were wondering, according to the U.S. Department of Treasury, on October 9, 2007, the 10-year bond was yielding 4.67%, the 20-year bond was yielding 4.93%, and the 30-year bond was yielding 4.87%. (2)
There is no question of the S&P 500’s volatility during this period.
However, what this implies is the power of equities for long-term investors, even with the second-worst market ahead of you.
Moreover, even if you invested on the absolutely worst day of the market for long-term investors since World War II, you still would be able to achieve a compounded rate of return of 8.44% in the 12.2-year period.
Dunham has updated its Market Cycle Chart through the end of 2019. This chart shows the nine market cycles since World War II including the 8.44% annual return for the investor that invested at the market high on October 9, 2007 and stayed with their investment through the end of 2019.
It also shows, on average, how much was lost in each bear market, the duration of the bear market, and the number of months it took to break-even, assuming you had invested at the top of that market cycle. It also shows the peak-to-peak return.
In summary, this chart will illustrate that, on average, since World War II, had you invested at the peak of a market cycle:
Ø Bear markets generated a -33.94% return and lasted 1.2 years
Ø It would take you a total of 2.9 years to break even from investing at the peak
Ø On average, $1 million invested at the peak would grow to $2,742,500 in 8.2 years (174.25% cumulative return)
The Dunham Market Cycle chart will show you the results for all nine market cycles since World War II.
To order your copy of this chart, please click here and we will rush the chart out to you.
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No two markets are the same and past performance is never an indication of future results. (1) The S&P 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 Index components and their weightings are determined by S&P Dow Jones Indices. It differs from other U.S. stock market indices, such as the Dow Jones Industrial Average or the Nasdaq Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. You cannot invest directly in an index. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. The solution for an investor depends on their and their family’s unique circumstances and objectives.
(2) https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2007Subscribe to the Dunham Blog