Financially Speaking: 5-Year Returns on Cusp of Big Boost
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How could we ever forget 2008 in the stock market? Via a 5- year bull market of course! With the stock market boasting all time record highs amidst a five year run it’s easy to forget what happened back in ’08, much less the 2000-2003 negative market movement. What’s making it even easier to forget is the fact that so many investments, particularly mutual funds, want to eagerly point out their five year returns. These numbers (if they haven’t already) will NOT include the 2008 recession. This can be very misleading to consumers looking for solid returns in what is shaping up to be a very shaky market in 2014 and beyond. This can be even more dangerous for someone getting close to retirement. Don’t forget in the last 13 years we have had 2 very significant drawdowns in the market.
Examine this data (excluding dividends):
The S&P 500 is widely accepted as a benchmark for gauging the performance of an investment. On December 12, 2008 the S&P 500 was at 879.73. On December 10, 2013 the S&P 500 closed at 1802.62. That is a 104.91% total increase, or about 15.42% per year compound.
If you go to McGraw-Hill’s website you can find the most accurate data regarding the performance of the index. In short, the index has a 5 year average that is over 15%.
Now compare that with some very commonly used mutual funds provided by the fund family American Funds. We will examine what I find to be the three most commonly used funds, Washington Mutual, The Growth Fund of America, and the Europacific Fund. All of this fund data can be found on the American Funds website.
S&P 500 – !SPX total return of 104.91%
American Funds Growth Fund of America – AGTHX – total return of 119.95%
American Funds EuroPacific Fund – AEPGX – total return of 66.70%
American Funds Washington Mutual – AWSHX – total return of 83.43%
Upon review it is easy to determine why the 5 year return numbers look so wonderful, the market itself has been very accommodating to a buy and hold strategy.
However, any buy and hold investor will do just that, HOLD. Diversification works, until…it doesn’t.
By simply backing up to a 7 year history we can see that the numbers are not nearly as attractive.
S&P 500 – !SPX total return of 26.31%
American Funds Growth Fund of America – AGTHX – total return of 28.80%
American Funds EuroPacific Fund – AEPGX – total return of -2.26%
American Funds Washington Mutual – AWSHX – total return of 9.62%
An investor earning a little over 5% a year can arrive in a comparable place with far less volatility, so why do investors ride this rollercoaster? Oh and wait, it gets even better. Look back over the last 14 years back to 1999.
S&P 500 – !SPX total return of 22.69%
American Funds Growth Fund of America – AGTHX – total return of 52.85%
American Funds EuroPacific Fund – AEPGX – total return of 13.36%
American Funds Washington Mutual – AWSHX – total return of 33.73%
If I invested money in an interest bearing account at 3.1% compound in 1999 and didn’t touch it until today, I would have more money than if I had purchased any of the funds referenced above. I also would have beat Vanguard’s S&P 500 Index Fund. Vanguard tells you that you can’t beat the market so just index to the market. I’m pretty sure 3.1% compound wasn’t hard to find back in 1999, and it can actually be found in today’s economy.
Bottom line is this, don’t be fooled by historical numbers regarding rates of return. The key is to look at how much money you would have in your account based on investing a specific dollar amount at a specific period in time. Secondly, if you plan to invest in the market, you need to be prepared to weather a 15 year crap storm like we just went through, and have the potential to be stuck in for another 15 years. Lastly, deploy strategies in your account to combat these types of market movements, and engage the services of a professional if you need help. Make sure that before you hire a professional you ask what I have coined as The Ten Most Important Questions to Ask Prior to Investing, which I will be publishing next month. If you want to get started right away, start by asking your professional what hedges have been put in place to reduce your downside risk. I anticipate that the next significant downward movement in the market is coming soon, and by the time this is published it may have already started. Don’t delay, protect your portfolio today!
This article was written by Jason Glisczynski and is not to be treated as investment advice. Investment Advisory Services offered through Brookstone Capital Management, an SEC Registered Investment Advisor.