The first quarter of the New Year has brought an astonishing sequence of global events. The horrific earthquake in Japan, the world’s fourth largest economy, has claimed at least 10,000 lives. Political uprisings throughout the oil-rich Middle East offer both promise and peril, but instability is the watchword. Domestically, states are struggling to address unprecedented fiscal crises and the federal government’s debt has risen to 97 percent of GDP, the 12th highest level among all nations. The dollar’s status as the world’s reserve currency is being openly questioned.
In this environment it is more important than ever for investors to remain disciplined. This is especially true in the “information age” when hyperbole and fear-mongering salesmen are only a mouse-click away. To that end, it is helpful to step back and review long term trends in security prices. The chart below depicts the (hypothetical) inflation adjusted returns provided by the S&P 500 since World War II.
Robust post-war growth defied the dismal forecasts of many economists, as did the stock market. A dollar invested in the S&P in 1945 would have grown to $6.91 by the end of 1964, for an annualized real return of 10.1 percent. But the good times did not last. A dollar invested at the beginning of 1965 would have fallen to $0.94 by the end of 1981, a 17 year span that led many to conclude that stocks should be abandoned as a long term investment strategy.
It turned out that 1982 would in fact have been a particularly bad time to throw in the towel. Over the next 18 years the index grew on average by 14.7 percent annually in real terms; a dollar invested at the end of 1981 would grown to $11.84 at the end 1999, even after adjusting for price inflation. The year 2000 ushered in the so-called “lost decade.” By the end of 2009 a dollar invested in the S&P would have fallen to almost $0.80.
These observations tell us nothing about what to expect over the next several years. We are confident however that as the market ebbs and flows there will be no shortage of doomsday headlines at market troughs, and at the peaks investment “geniuses” will abound, touting their track records as “skill”. The best defense against these threats is a well diversified portfolio that includes foreign stocks, bonds, gold, and REITs, in addition to U.S. stocks.
Also In This Issue
Gold, Money, And Portfolio Theory: An Update
Risk And Return Revisited
Foreign Debt: Possibility And Peril
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Recommended Investment Vehicles
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