It has been 10 years since the end of the 2003-2007 cyclical bull market. During that time, investors who held onto their equities have doubled their money. Yes, you read that right: Doubled their money.
The S&P 500 Index peaked on October 9, 2007. In March 2008, just six months later, Wall Street giant Bear Stearns collapsed. Lehman Brothers followed before the end of the year, and the global financial crisis was in full swing.
When all was said and done, the U.S. economy experienced its worst downturn since the Great Depression. Stocks, as represented by the S&P 500 Index, fell by as much as 56%. A stock portfolio valued at $100,000 in October 2007 was worth $44,000 by March 2009. Today, that same portfolio is worth $200,000 Exhibit 1.
That is 7% returns per year, including during the downturn. Based on the Rule of 72, that’s a double in roughly 10 years.1
Unfortunately, many investors were not around to experience it because they bailed out early and, as a result, missed the opportunities for growth offered by the second-longest secular bull market on record, which is still going strong. From the S&P 500 Index’s peak in 2007 through the end of 2012, investors pulled more than $82 billion out of equity mutual funds and exchange traded funds (ETFs), while pouring more than $1.2 trillion into bonds (mutual funds and ETFs) during the same period.2
Time in the Market, Not Timing the Market
As we have said many times, it’s time in the market, not timing the market that matters. There are two types of investors: Those who adhere to the principle of consistency and those who will struggle to save enough for retirement, a child’s education, or the purchase of a home.
How can the market have doubled in the past 10 years? In that time we have had a global financial crisis of epic proportions, the rise of ISIS and deadly terror attacks in major European cities, horrific natural disasters, the European sovereign debt crisis, the downgrade of U.S. government debt, the rise of a nuclear North Korea, tax hikes, and countless other events too numerous to mention.
It can happen because we have also had technological advancements and innovations that seemed more like science fiction than reality a decade ago. The past 10 years have brought us self-driving cars, multi-use space rockets, human-like robots, genetic engineering, home delivery of goods by drones, 3D-printed glands and organs, streaming television, bionic eyes, the tablet on which I am writing this blog, and countless others. We can only imagine what the next 10 years will bring.
The fact is that investing in equities has never primarily been about assessing geopolitical risks. Rather, it is about analyzing current cash flows of businesses and projecting their future cash flows. Innovative companies that provide goods and services that other businesses and consumers demand will be rewarded over time, and so will their investors, irrespective of the political and geopolitical background. Remember, stocks are positive 94% and 99% of the time over any 10- and 15-year period.
Add 10/07 to 9/17 to the list.
Compelling Wealth Management Conversations is a program designed to help provide philosophical and historical context and perspective to keep investors “buckled in” and stay the course during uncertain times (and when have times not been uncertain), while providing a framework to help identify the best opportunities going forward.
- ^ The Rule of 72 is a calculation for determining how long it will take an investor to double his or her money based on annual return. It states that if an investor takes the annual return (expressed as a percentage) from any investment and divides it into 72, the result is the number of years it will take to double the money.
- ^ Source: Morningstar Direct, 8/31/17.
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