February 10, 2009
Stocks lose money after inflation
Let’s look a final example of fun with numbers.
A recent newspaper cover story featured an interview with Edward Kerschner, chief strategist with Citi Global Wealth Management, stating that in real terms the Dow fell 47% from 1960 to 1980. Kerschner’s point was that markets can be horrible places for long periods of time (especially with free spending presidents such as Kennedy, Johnson, Nixon – and perhaps Obama.)
Here are the year end numbers for the Dow, both before and after inflation:
Dec 31 |
Year end Dow Jones index |
Adjusted for inflation |
1959 |
679 |
679 |
1979 |
899 |
344 |
Again, it’s tough to argue that this 20 period was good for investors in real terms – until we look at a broader based measure of stock market performance and include dividends.
S&P 500 from Dec 31 1959 to 1979 |
Gain |
Real return adjusted for inflation |
Capital gain |
80% |
(31%) |
Total return |
275% |
43% |
On a total return basis, the annual real return in this 20 year period was 2% - because of a combination of lower stock market returns and much higher inflation than the historical norms. This period did indeed substantially underperform the historical real return of 7% (a gain of 10% less 3% inflation). Still, underperforming with a real return of 2% is a very different story than losing almost half your money.
And again, on the theme of cherry picking time periods, if we use the 20 year period starting one year later, from the end of 1960 to the end of 1980, cumulative real returns were 71%, more than 50% higher.
None of this is intended to say that stocks will always be a safe or pleasant haven for investors. Despite the overwhelmingly positive returns long term investors in U.S. stocks have enjoyed across virtually every time frame, there is always the possibility that it could be different going forward.
Just remember, though, the only guide we have going forward is what happened in the past. And in looking at the past, we need to look at all the facts – not just those selected by people looking to grab newspaper headlines.
There are three key takeaways for advisors from this analysis:
- It’s fine to express doubt to clients about negative claims in the media, but being skeptical isn’t enough unless you’re able to provide hard data to offset suspected misinformation.
- Don’t fall into the trap of using narrow indexes and excluding dividends. The only thing that matters to investors is total return – and that’s the only thing you should talk about. Remember, whenever clients or industry analysts talk about the Dow Jones or the S&P, they almost always exclude dividends.
- Unless you have a solid knowledge of the facts, you will be unable to combat some of the distortions your clients will see in the media. Invest the time to ramp up your understanding of history to be a better resource to clients.
* Dan Richards conducts programs to help advisors gain and retain clients and is an award winning faculty member in the MBA program at the University of Toronto. To see more of his written and video commentaries and to reach him, go to www.strategicimperatives.ca.
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to .
