S&P500 actually down 17% from 2000 peak

[soupcxan]

Interesting article in the NYT today, author basically says that the hoopla around the stock market indexes reaching new highs is bunk because inflation has reduced our purchasing power since the highs were reached earlier this decade.

Obviously no one will dispute that inflation diminishes your true return (in purchasing power) from any investment, whether it's stocks, real estate, or b33ver ch33se futures. Even "inflation-indexed" bonds seem to be woefully inadequate (since they're indexed to a manipulated metric).

Is there any investment (or asset class) that has a better chance of standing up to inflation while still capturing some benefits from growth in the economy (gold works on the first part, but not the second). Does the future hold mostly flat returns from equities after adjusting from inflation? And if so, how should we invest to protect ourselves?

http://www.nytimes.com/2007/07/18/business/18leonhardt.html?ref=business

One "investment" that comes readily to mind is higher education, since your salary should rise with inflation and you'll get more of the benefit if you are towards the top of the income scale. Plus, if you take out student loans, you can pay those back later with nominal dollars that are worth less in real terms. But then, I'm starting an MBA this fall, so maybe I'm just looking for a justification...

 

[Sam]

He forgot reinvested dividends, I think.

 

[cute fuzzy bunny]

gold works on the first part, but not the second

Considering that the price of gold in 2004 was about the same as it was in 1980...I dont think it reliably works for any part.

My patience for an investment is pretty far short of 25 years. In fact, during the late 90's when the price of gold dropped a couple of hundred bucks after going nowhere for 18-20 years, I think i'd have thrown in the towel.

 

[soupcxan]

Not sure about that...I looked at the adjusted historical prices which should include dividends for VFINX (Vanguard's S&P500 index fund) on Yahoo finance. The monthly high was $125.66 in August of 2000 vs. the current price of $142.76, so in 7 years your total return was 13.6%, which is roughly an annual return of 1.8% (compounded). Pretty weak...and that's before inflation. If you assume 3% per year increase in prices, you actually lost ground over the last 7 years.

 

[maddythebeagle]

Interesting article in the NYT today, author basically says that the hoopla around the stock market indexes reaching new highs is bunk because inflation has reduced our purchasing power since the highs were reached earlier this decade.

Why does it really matter? unless you had put all of your money in at the high point....I dont think most people esp. people saving into a 401k account, etc. They invest with every paycheck...

 

[justin]

What if you happened to miss the peak by a year either way? If you invested in March 1999, you would be sitting on a 37% return from VFINX (Vanguard's SP500 mutual fund) versus inflation of 26.2%. If you invested in March 2001, you would be sitting on a 50% return from VFINX (Vanguard's SP500 mutual fund) versus inflation of 18.2%.

Most folks didn't invest 100% of their assets on the peak day in March 2000. Most folks investing in the SP500 for a significant period of time invested at much lower average prices versus the March 2000 peak and have seen returns that beat inflation.

Gold seems like a much worse investment than the SP500 using the author's analytical framework. I'm still waiting for gold to return to it's 1980 peak of $850 per oz. And that is nominal price. To see a real return of ZERO in gold since it's 1980 peak, the price would need to be $2210. Nymex is quoting spot gold at $673/oz. right now. Still a little ways to go before it gets to break even, in real terms...

I'm pretty convinced equities are the way to go to have the best chance of beating inflation long term and maximizing returns in the mean time.

(edit - all the other previous posters beat me to the punch)

 

[Webzter]

So, the meat of the article is 'numerically, we broke a record but it doesn't mean anything'

Well, that's a very valid point... which is why, as he says, it's silly to bother caring if the Dow broke x or the S&P 500 broke y.

But, I'm not so sold on the rest of the article. It's pure speculation on everyone's part to say if we're going to correct harder in the future or if the market has, largely, efficiently priced the stocks where they stand now.

Plus, aside from the first point of the article, it seems a bit arbitrary to start at the peak of a bubble and then compare it to now, just 7 years later. After all, the historical average, as I understand it, is that the market returns 10% a year over the long term; 7 years with arbitrary data points is not long term.

 

[Sam]

Not sure about that...I looked at the adjusted historical prices which should include dividends for VFINX (Vanguard's S&P500 index fund) on Yahoo finance. The monthly high was $125.66 in August of 2000 vs. the current price of $142.76, so in 7 years your total return was 13.6%, which is roughly an annual return of 1.8% (compounded). Pretty weak...and that's before inflation. If you assume 3% per year increase in prices, you actually lost ground over the last 7 years.

You're right.

 

[TromboneAl]

The most important thing is that it demonstrates the stupidity of the national news media. Yes, I'm sure someone at NBC understands inflation, but it doesn't stop Brian Williams from making it one of the top stories, and Bartiromo talking about how 80% of the advisers say it's going to continue going up. I guess they figure that most viewers can't comprehend inflation.

Then it's on to the latest scare-of-the-day stories: danger in food supply, Al qaeda in US, etc.

There's no hope. Being a curmudgeon sucks.

 

[rnitz]

Not sure about that...I looked at the adjusted historical prices which should include dividends for VFINX (Vanguard's S&P500 index fund) on Yahoo finance. The monthly high was $125.66 in August of 2000 vs. the current price of $142.76, so in 7 years your total return was 13.6%, which is roughly an annual return of 1.8% (compounded). Pretty weak...and that's before inflation. If you assume 3% per year increase in prices, you actually lost ground over the last 7 years.

I don't think so. Vanguard VFINX distributes dividends as new shares to it's fundholders, not by increasing the fund price.

Also, VFINX closed at 141.03 on Mar. 23, 2000 (daily price on Yahoo's finance). As a longtime holder, I thought I remembered it getting to the 140's back in the bubble days - it took a long time to return (although the new shares from dividends have helped).

 

[Sam]

I don't think so. Vanguard VFINX distributes dividends as new shares to it's fundholders, not by increasing the fund price.

Are you sure? I don't own VFINX, so I don't know.

But what you said is definitely true with Fidelity Contrafund, which I own.

 

[rnitz]

I'm sure about the dividends being distributed in new shares - I get them every quarter.

I'm pretty sure about remembering VFINX reaching the 140's in the year 2000, but it seems to be confirmed by Yahoo's data.

I'm guessing the "adjusted price" in Yahoo is trying to reflect what the impact of dividends was. i.e. the share price actually is the same now (142) as it was in Mar. of 2000, but because you would have received dividends over those years, it's as if you bought it at 125 in Mar. 2000, and now have it at 142. Just my guess.

 

[cute fuzzy bunny]

Total returns including dividends, adjusted for inflation, are higher now than they were at the market peak 7 years ago.

The author seems to have screwed up a bit.

 

[ats5g]

I'm sure about the dividends being distributed in new shares - I get them every quarter.

You might want to "recheck" that. You're probably reinvesting the dividends VFINX pays out back into VFINX instead of having the dividends given to you as cash. Hence, the shares of VFINX you own increase after the dividend because your buying more with the dividend money.

You can also choose to not have those dividends reinvested. It is an option that you can change under "My account options" if you have an IRA directly with Vanguard. Otherwise, it's an option that you can change in your brokerage account.

- Alec

 

[rnitz]

ats5g - You're right, I re-invest dividends in VFINX. I should have made myself more clear. What I meant was that the payment of those dividends doesn't "stay" in the fund and directly increase share price, but goes out of the fund (and in my case goes back into the fund as additional share purchases).