Investors are rightfully worried. They’ve watched the market going down, the market trying to go up, and market pundits saying it is probably going down again. What is an investor to do? We’ve already told you that selling out now is the worst move you could make. But what should you be doing? While past performance is not indicative of future results, we still like to look at the history and how the market has reacted to recessions. History doesn’t repeat, but it often rhymes. So, let’s take a closer look at modern history.
If you had put all of your money into the market, as defined by the S&P 500 Index, on March 24, 2000, the peak of the market before the Tech Bubble burst, your annualized return through April 8, 2020, would be around 4.8% or over 157% total return through the bubble bursting, the near 20% dip in December 2018, and our current drop.
Think about what you were dealing with in 2000, the price-to-earnings ratio, which measures a stock’s or index’s current share price relative to its per-share earnings, was 37, while the long-term average is 16.5. Today we see a P/E of 17.5. At a P/E of 37, the peak Tech Bubble market was more than twice as expensive as the long-term average. Furthermore, can you find a Treasury or even a corporate bond today that pays 4.8%? Currently the 30-year Treasury bond pays around 1.3%. To find a 4.8% yield, you’d have to be buying junk bonds, which are as volatile as equities, so why not lessen the risk by investing in Blue Chip stocks that can weather the recessions?
Let’s look at another financial crisis. If you bought into the market on Oct. 9, 2007, the peak before the financial crisis, today, you’d have an annualized return of 6.5%. Those returns are through April 8, 2020, where we’re down more than 17% from our most recent high.
We also preach about dividend-paying stocks. At the beginning of the year, the S&P 500 Index yielded 1.8% in dividends. As of April 8, 2020, it has increased to 2.28%. Remember that a 10-year Treasury yields 1.7% and a 30-year Treasury yields 1.3% annually. Those are fixed yields that will never increase until they mature. If you buy a $1,000 bond, you will lock in a 1.7% return for 10 years. If you buy $1,000 of stocks, you have a dividend that will grow on top of any price appreciation the market might see.
Stocks experienced a 74% price appreciation from the peak of the Tech Bubble, but because dividends were reinvested, your price appreciation is actually more than 157%. Likewise, from the top of the market prior to the financial crisis, stocks saw a price appreciation of about 70%, but reinvesting dividends brought the total return to 121.5%.
These returns are also measured as if you invested all at once during these historic market highs. The minute you dollar-cost average your money into the market, buying a fixed-dollar amount at set intervals, your rate of return will jump because you’ll be buying more shares when the market is down, and fewer when it is high. Over the long term, you’ll lower your average price per share, and, in turn, your return on investment will increase.
Seeing this historical example supports our belief that stocks are the place to be for long-term growth, meaning money you don’t need within the next 10 years. We understand how difficult it is to look at your statement and see your portfolio down 30%—almost every investor will second guess their decisions. Our philosophy of only investing long-term money into the stock market helps take the emotion out of your investment decision.
If you have questions regarding investing your long-term money, the experts at Henssler Financial will be glad to help: