With 2011 behind us, most stock investors will look back upon another subpar year. The S&P 500, the broad index of US large company stocks, ended up about even. While international diversification has been a wise strategy over time, this year the MSCI EAFE international developed market index was down more than 12 percent.
Individual investors are largely disgusted with these results and with the overall proposition of investing in the stock market. Much of this disdain stems from the volatility in the market last year. Although the S&P 500 was even for the year, it was flat like a loop trail up Green Mountain. We ended up at the same elevation as we started, but we’re exhausted with the ups and downs along the way.
Starting the year with an 8 percent gain, the U.S. market reversed course and was down more than 19 percent from the peak. In the fall, multi-hundred point moves in the Dow were commonplace.
Many of you bailed out of this hilly ramble, with investors cashing out over $100 billion in stock mutual funds in 2011 through the end of November. With investor unease, volatile returns, and a slew of risks including underemployment at home and Euro collapse abroad, many think you would be a fool to stay in stocks. Wait until it starts going up and we can see a trend, they may say.
Over the past decade, the picture does not improve. With the S&P currently hovering below 1300, we are roughly where we were in early 1999. Thirteen lost years. On an inflation-adjusted basis this performance is similar to the Great Depression’s and is close to the period between 1969 and 1981 with negative inflation adjusted returns.
Although the future will not mirror the past, let’s examine those two putrid periods last century and see how the stock market fared afterwards. Starting in 1982, the S&P 500 returned 17 percent in one year, and averaged 12 percent over three years and 13 percent over 10 years adjusting for inflation.
In 1942 once the Great Depression ended, the market vaulted up 10 percent in one year; it gained 11 percent over 10 years, again adjusting for inflation.
But times are different now, you may say.
You’re fearful that the U.S. and the world will be suffering economic doldrums for many years. Capitalism on a global scale is tottering, and the big megabanks have led us into a ruin from which we may never recover.
True, it takes guts to be positive about today’s markets. But think about the challenges our parents and grandparents faced at the end of those horrible periods. In 1942, we were facing potential world domination of a fascist regime. It’s tough to be optimistic when seeing clips of brigades of goose stepping Nazis at the local movie house.
The early 1980s were not as dramatic, but with interest rates close to 20 percent and inflation in the double digits, there was plenty of economic misery. Imagine affording your house with an 18 percent, 30-year mortgage, and you’ll begin to understand how dire the circumstances were.
Those few investors who were able to keep the faith during these dark times were richly paid in the years that followed. We are rarely rewarded for jumping in when everyone else thinks it’s a good idea. But being a contrarian has had its rewards over time. While I don’t know whether 2012 will be better than last year, it’s highly likely that the next decade will be significantly better than our recent past.