Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

2020The investment that destroyed the S&P 500

https://www.capitalists.com/blog/2020/01/21/the-investment-that-destroyed-the-sp-500/

2020The investment that destroyed the S&P 500

The year was 1990, and the Soviet Union was on the verge of collapse. The Berlin Wall was still in the process of being destroyed, and East and West Germany were set to reunify later in the year.

Comments

  • edited January 22
    Very interesting article. I am not sure how many times that has happened. Being aware of that now we should be on the lookout for a higher 30 year. There was most likely a very nice CG along the way too. I am not sure how there was any inflation protection though.
  • edited January 22
    I remember those (80's) years well. My family had some A rated bonds that were paying north of 10% interest.

    The article's message (although unwritten) brings forward a good reason to have a portfolio that is built upon both stocks, bonds and (yes) cash. Bank then I had a bank money fund that paid well along with some CD's that were held in an IRA account. It was not hard at all to get eight ... ten ... and even twelve percent on fixed investements back in the 80's. Stock dividends, in gereral, were higher back then than they are today as well.

    Have a good one ... and, most of all ... I wish all "good investing."
  • But let’s go back 20 years to early 2000, when the S&P 500 was at roughly 1500.

    If you had bought then and held until now, that works out to be an average annual return of just 4%.

    4% is better than zero… but it’s hardly anything to write home about.

    [This return doesn’t factor in dividends, taxes, fund management fees, or inflation… but those effects all largely offset one another.]

    ...since 2000, the S&P 500 has returned just 4%, while a 20-year government bond would have paid you 6.9% over the same period. That’s a HUGE difference of nearly 3%.
    A most slanted "analysis".

    The nominal rate of return of VFINX, including dividends and management fees was about 6.2%. (A $10K investment on 1/22/2000 would have been worth $33,232.15 on 1/21/2020 according to this M* chart.)

    The article notes that the S&P 500 figures would have been lower after taxes. Mysteriously though, it doesn't likewise take note of the ordinary income taxes that would have been owed on interest paid year in, year out by long term bonds.

    Sure, VFINX spins off taxable divs, and they're significant. A fact that article chose to ignore. Still, only part of VFINX's gain would have been taxed annually. In addition, starting in 2003 those divs would have been qualified, thus taxed at the lower cap gains rate. As would its appreciation have been taxed as cap gains upon sale at the end of 20 years.

    Now let's talk about reinvestment risk. Had you purchased a Treasury in 2000, you would have received taxable interest of 6.9% on that principal each year. But you would not have gotten 6.9% on your reinvested interest. You would have ridden the yield curve all the way down to 2% over the next couple of decades.

    Put together the taxes and the decline of rates on reinvested interest, and that 6.2% return on VFINX begins to look pretty good. And that's including the (lack of) returns through the "lost decade".
  • 4% after the year we just had. Sheesh. I am totally out of indexes in my IRA. Well. I did invest some of the proceeds in the Doubline Shiller/Cape fund DSEEX. So I guess I'm not totally out. But I'm not nearly as FAANGed as I used to be.

    Vanguard's indexes in the small and mid space are hard to beat in taxable accounts.
  • @msf, Aren’t Treasury’s federal tax-exempt?
    msf said:

    But let’s go back 20 years to early 2000, when the S&P 500 was at roughly 1500.

    If you had bought then and held until now, that works out to be an average annual return of just 4%.

    4% is better than zero… but it’s hardly anything to write home about.

    [This return doesn’t factor in dividends, taxes, fund management fees, or inflation… but those effects all largely offset one another.]

    ...since 2000, the S&P 500 has returned just 4%, while a 20-year government bond would have paid you 6.9% over the same period. That’s a HUGE difference of nearly 3%.
    A most slanted "analysis".

    The nominal rate of return of VFINX, including dividends and management fees was about 6.2%. (A $10K investment on 1/22/2000 would have been worth $33,232.15 on 1/21/2020 according to this M* chart.)

    The article notes that the S&P 500 figures would have been lower after taxes. Mysteriously though, it doesn't likewise take note of the ordinary income taxes that would have been owed on interest paid year in, year out by long term bonds.

    Sure, VFINX spins off taxable divs, and they're significant. A fact that article chose to ignore. Still, only part of VFINX's gain would have been taxed annually. In addition, starting in 2003 those divs would have been qualified, thus taxed at the lower cap gains rate. As would its appreciation have been taxed as cap gains upon sale at the end of 20 years.

    Now let's talk about reinvestment risk. Had you purchased a Treasury in 2000, you would have received taxable interest of 6.9% on that principal each year. But you would not have gotten 6.9% on your reinvested interest. You would have ridden the yield curve all the way down to 2% over the next couple of decades.

    Put together the taxes and the decline of rates on reinvested interest, and that 6.2% return on VFINX begins to look pretty good. And that's including the (lack of) returns through the "lost decade".
  • edited January 22
    .
  • Treasuries are state tax exempt, not exempt from federal taxes.
  • 6.2 seems more like numbers I've seen before.

    Not quite the rosy scenario for stock returns that was often painted before 2000.

  • If you started in 1991 instead of 1990 stocks would look better
Sign In or Register to comment.