Investing in a Stagnant Market

puneri_punter · Post by **puneri_punter** » Mon Jan 21, 2008 5:20 am

Financial Gurus,

I recently read an article that compared the 2000's (i.e. 2000-2010) to the 70's when for almost a decade the market remained mostly flat.

The S&P 500 on Jan 3, 2000 was 11,522 and on Friday 1/16/2008 it was 12,565. If you look at a 1/1/1965 to 1/1/1980, the DJIA was almost flat. The DIJA on 1/4/1965 was 882 and 15 years later on 1/7/1980 was 858!!

In my opinion, "Return" on investment has two components. One is capital appreciation and second is dividend/yield.

For 1/1/1965 to 1/1/1980, if you had DCA into an index fund that tracked DIJA (or S&P 500) you return would have been negligible because there was almost no significant capital appreciation. Also most of the companies give divided that is below CD rates.

Therefore you would have been better off if you have invested that money in a CD. Only in the 80's and 90's did the stocks provide capital appreciation.

Assuming my hypothesis is true, you should only invest in actively managed mutual funds because only they can "hope" to give you a better return that the Index.

To save for retirement, we all have a 30 year window of saving. If you encounter a flat line like the 70's or 2000's early in your retirement window you are screwed big time because you will not have enough money to leverage the effect of compound interest in the later years.

Am I missing something or misunderstood something or misinterpreted
something?

Please enlighten.

abuSibu · Post by **abuSibu** » Mon Jan 21, 2008 6:06 am

The same can be said for any asset class if you pick a specific period. Secondly, we invest in multiple asset class to mitigate this situation. Third, DJIA index (read largest of large cap) is not a diversified portfolio. They do well only when the economy is fired up on all cyclinders.

Has the article provided any return for S&P 500, Total Bond market index, Total International stock index for the same period? What abour Real Estate, Precious metals, etc. during that same period. I am interested in that.

By investing in all asset classes in those periods, do you think one could have beaten the inflation?

gurusw · Post by **gurusw** » Mon Jan 21, 2008 9:06 am

Can you provide the link for the article please?

puneri_punter · Post by **puneri_punter** » Mon Jan 21, 2008 8:29 pm

Here is one of the good links:

http://money.cnn.com/2004/05/11/markets/seventies/

I had read similar more recent articles. I will post the links when I find them. It was also discussed in CNBC. (Disclaimer: I am not a great fan of CNBC)

RRK · Post by **RRK** » Mon Jan 21, 2008 9:21 pm

OP,
You get into this problem if you invest only in one stock market. For example, Japaneese investors are still worse, if they believed and invested in only in their local market.

This is why you have to invest across countries and invest across other assets like bonds, cash, etc,

If possible, check how US treasuries faired in the period you mentioned.

sftrade · Post by **sftrade** » Mon Jan 21, 2008 10:54 pm

I believe interest rates were very high in that period. Treasuries wouldv'e yielded negative returns. Fixed deposits or TIP's would be the only positive returns IMO

puneri_punter · Post by **puneri_punter** » Tue Jan 22, 2008 8:11 am

RRK;74150OP,
You get into this problem if you invest only in one stock market. For example, Japaneese investors are still worse, if they believed and invested in only in their local market.

This is why you have to invest across countries and invest across other assets like bonds, cash, etc,

If possible, check how US treasuries faired in the period you mentioned.[/quote]

RRK,

Going by the following Federal Reserve website the CD rates were between 5 to 10 %. This is not a whole lot better.
http://research.stlouisfed.org/fred2/categories/22
(The link has pretty good historical stuff).

Therefore even if you invested across multiple asset classes you would not have done better.

The only saving grace, as you mentioned, is to invest across countries. But then again the Developed Markets tend to follow the same trend as the US.

Only the Emerging markets would offer some relief at a higher risk.

gurusw · Post by **gurusw** » Thu Jan 24, 2008 9:06 am

puneri_punter;74338RRK,

Going by the following Federal Reserve website the CD rates were between 5 to 10 %. This is not a whole lot better.
http://research.stlouisfed.org/fred2/categories/22
(The link has pretty good historical stuff).

Therefore even if you invested across multiple asset classes you would not have done better.

The only saving grace, as you mentioned, is to invest across countries. But then again the Developed Markets tend to follow the same trend as the US.

Only the Emerging markets would offer some relief at a higher risk.[/quote]

I think 5-10% CD rates are good deal in stagnant stock market.

Btw as we saw this week, emerging markets also followed developing markets as far as stock market ride is concerned. So it's mainly diversification across asset classes that matters.

upendora · Post by **upendora** » Fri Jan 25, 2008 10:00 am

If you are preparing for retirement, start planning for worst case scenario:

1. A declining stock market for 10 years. <-- not just a stagnant market.
2. Raising inflation in food, energy and medical expenses.

You only have one chance in this life.

doesntMatter · Post by **doesntMatter** » Sun Jan 27, 2008 6:45 pm

I see one loophole in that argument. If you take it end to end i.e., 2000-2008 or 65-80, it seems flat, but as the OP mentioned, if you DCA, there are quite a few cyclical trends and you would have had ample opportunity to buy low and I feel that you would have had a higher return. This is what I feel but have no data to back it up. What do the experts think ? is there any research out there that has this data ?