Last year was a great year for U.S. stocks, among the best investments one could have made, up about 30% over 12 months.
The year 2013 was great, but not the best ever. Several years in the mid-1990s were slightly better. In 1954 the index rose by 45%.
As the traders often say, a good year can follow a great year. It’s hard, naturally, to put much faith in such optimism right out of the gate. Year-to-date, the index is down slightly. It briefly set a new high but also has fallen sharply below the close of Dec. 31.
But let’s put all this into context. Think back to, say, 1986. A house cost $86,600, gas was 93 cents. The Cold War was ending, Halley’s comet passed by and Mike Tyson was the heavyweight champ.
That year, the S&P 500 started at 210 points. So, in broad terms, U.S. stocks rose nearly eightfold in value over those 27 years.
Throughout, there were good, great years, bad years and years it would be best to forget. Along the way, however, you would have been rewarded with dividends as well.
Stock ownership is sometimes derided as a casino bet and nothing more. While it is true that one must buy low and sell high, critics of investing often fail to mention dividend income, which added to stock price increases gives you what’s known as “total return.”
Adding in the gains from dividends, the annualized 27-year total return of the S&P 500 as of 2013 was 10.53%. Nice work if you can get it.
Invested at 10.53%, your money doubles every 6.8 years. At that rate, a one-time $10,000 investment in 1986 would be worth $165,489 today. Thanks to compounding, a saver adding $10,000 a year would be sitting on $1,680,994. Very nice work.
Yes, gas today costs more than 93 cents. Houses are a bit pricier as well. But that’s just normal inflation, yet another argument for stocks. Very few investments help you to outpace the inevitability of inflation like stocks.
Reducing risk is the key. The simplest method of keeping a lid on risk is to own stocks as part of a balanced portfolio that includes bonds, real estate, commodities and international investments.
Your exposure to stocks and their relative volatility should be a measure of your time left to retirement and nothing else. Not predictions of a coming decline in the economy. Not crystal ball guesses as to the closing price of the markets in 12 months time.
The other major factor at work is cost. The more you pay for money management the less you have to invest, simple as that. Investment fees eat up nearly a third of your potential gains. A low-cost index fund or index ETF will help you get to your goals without overpaying to get there.
You need stocks in your investment portfolio. However, your exposure to stocks need not be and should not be 100% of your savings. Nor, however, should it be zero, or you could easily miss a year like 2013, as many investors did.