This is the seventh article in a series that will discuss and explain basic investment concepts in hopefully an understandable and meaningful way. Whether you work with an investment advisor or choose to do your own investing, there are some things you need to know to be successful. Here is my take on what those things are.
The Mathematics of Subtraction as it Applies to your Investments. Here is a scary thought: if your investments are down in value 50%, what percentage do you have to earn to get back to even? If your $100,000 is now $50,000, that $50,000 will have to double or grow 100% to get back to where you are. That is big mountain to climb, and probably a reason for many folks to sell their investments during scary times.
Well the good news is that the U.S. stock market has a strong history over time of overcoming the math of subtraction and doing some good addition after you got back to even. J. P. Morgan Asset publishes a quarterly report entitled “Guide to the Markets. There are many juicy investment tidbits in the piece. One of their charts is entitled “S&P 500 at inflection points”. This quarterly updated chart shows 20 years of market performance and some pretty exciting examples of the mathematics of subtraction. From 12/31/96 to 3/24/00 the market rose 106% (ending at 1,527). From 3/24/00 to 10/09/02 the market subtracted 49% (ending at a terrifying 777). Well, not surprising to me, the bull market that followed added 101% ending at 1,565. The next subtraction ending on 3/9/09 was a whopping 57% that took the S&P 500 to 677. Thankfully, the bull market to follow has been the longest and strongest we have ever seen. That 777 was 2,199 as of 11/30/16 which made for a 225% increase. As of today (2/13/18) that number is 2,646.
To be clear the 500 largest companies in America, as represented by the value of the S&P 500, have risen from 741 to 2,199 in twenty years. That happens to be a 5.58% per year compounded return for twenty years. That return is not counting the investment dividends generated during that time. If those were counted in the return, it would be larger. The United States stock market has done an excellent job of overcoming the mathematics of subtraction for that 20 years, which included two terrifying bear stock markets. That performance has actually been a reality for much longer than those twenty years.
So … the next time you get concerned about your nest egg being down in value, please be comforted that there has been a whole lot of addition created by the performance of America’s great companies over the long run. Yes, you must be a long term investor to take advantage of that math. And please don’t forget that you are a long term investor, because your investment time frame in the rest of your life.
All articles in this series will be posted on my website McNamaraFinancial.com. If you have any question or comments I can be reached at mike@McNamaraFinancial.com. I promise I will respond.
Michael J. McNamara, Ph.D., CFP®
CERTIFIED FINANCIAL PLANNER™
Disclaimer: Any financial advice in this article is intended to be generic in nature. Readers should consult with their own financial advisors before implementing any advice or suggestions above.