We find ourselves not only in a questionable stock market, but also in a depressed real estate market resulting from sub-prime lending troubles. With all of this bad news is there anything good left to talk about when it comes to your savings? Does this mean there is no hope for you? Absolutely not!
Let’s first understand what investors have been exposed to since April 1, 1999. Then, the S&P 500 index was trading at 1293.72. Ten years later the index closed at 1370.18. That is an average annual growth rate of 0.64 percent per year. The challenging thing for most investors is that the index spent over 61 percent of the last nine years trading below the 1999 closing value. Investors trying to access their funds during this period would most likely have done so at a loss. Between 2001 and 2006, these losses could have easily ranged from -10 percent to more than -35 percent. As the market climbed back to break even, those individuals who sold at a loss would have missed the opportunity for recovery.
Consider another way to think about this:
If you were invested in the S&P 500 Index with $100,000 in 1999, your investment would now be worth $105,910 assuming you made no withdrawals.
Over the last nine years, there were actually five years when the S&P 500 was higher than it had been 12 months earlier. The problem is that most of these years of gain were spent climbing out of a deep hole. Even when investors were experiencing an increase in their investment value, it was less than what they started with.
Wouldn’t it be great if you could participate in the good years while sitting out the bad? What would happen if we had $100,000 over the last nine years that grew when the market index went up, but didn’t lose a penny when the index went down?