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How Ordinary Investors Trounced the Lost Decade

A lot of press has been generated from the fact that the first decade of the 2000s was a lousy one for investors. Some even went so far as to call it the worst decade ever.

Well, even for a lousy decade, it was trivially easy to make money. All you had to do was dollar-cost average into a low-cost S&P 500 index fund and reinvest your dividends along the way.

Beat the headlines
It's true that the S&P 500 index fell an alarming 24.1% over that particular 10-year stretch. But someone who invested $100 a month in the SPDRs (an exchange-traded fund that tracks that index) and reinvested dividends actually earned a total 5.9%. That investment turned $12,000 worth of capital into $12,709. It wasn't much, but if that's the kind of returns you can get in the worst decade ever, imagine how well you can do in a more normal investing climate.

Ordinary folks, after all, don't make a one-time investment and then simply let it ride. For the most part, regular people invest a little bit at a time, either with their paychecks or when they've got some extra cash available. As you can tell, there can be a huge difference between the market's headline returns and what real people see when investing real cash in a real strategy.

When all is said and done, the money you'll have available to you for your retirement is money you will have saved throughout your entire career. That makes noisy nonsense such as the handwringing over the decade-long decline in the market all the more dangerous. If such headlines discourage people from investing, then they will miss out on all the returns they would have gotten over their careers -- the returns made possible from making regular investments over time.

What you get for your money
If investing still seems like an outrageous idea thanks to the past 10 years' lousy returns, remember that stocks are simply small ownership stakes in companies. And market indexes -- like the S&P 500 -- are nothing more than collections of stocks. So when you invest in a market-tracking fund, what you're really buying are tiny slices of hundreds of companies, like these:

Company

Trailing Earnings
(in Millions)

Percent
of S&P 500

ExxonMobil (NYSE: XOM  )

$21,050

3.24%

Microsoft (Nasdaq: MSFT  )

$13,770

2.32%

General Electric (NYSE: GE  )

$11,750

1.73%

AT&T (NYSE: T  )

$11,920

1.69%

Pfizer (NYSE: PFE  )

$8,090

1.48%

Cisco Systems (Nasdaq: CSCO  )

$5,720

1.39%

Coca-Cola (NYSE: KO  )

$6,280

1.25%

As long as the companies behind those stocks remain profitable, their shares should be worth something. And as their management teams work to grow their businesses and profits over time, their share prices can rise in response to that growth. You know -- the kind of returns people expect in markets that don't turn out to be the worst 10 years ever.

Real strategies for real people
At Motley Fool Rule Your Retirement, we've read the same headlines and lived through the same 10 years that every other investor has. The difference is that we're grounded in the real world, where real people invest their cash over time. Our tools, techniques, and strategies are dedicated to helping you design and fund your best possible retirement, based on how investing really works for regular people.

If you're ready to get past the headline-driven fearmongering and focus on a plan that's based on reality and can actually take you from here to retired, join us today. To see the practical tools and strategies we provide to our members, click here to start your 30-day free trial. There's no obligation.

At the time of publication, Fool contributor Chuck Saletta owned shares of Microsoft and General Electric. Coca-Cola, Microsoft, and Pfizer are Motley Fool Inside Value picks. Coca-Cola is a Motley Fool Income Investor recommendation. Motley Fool Options recommends a diagonal call on Microsoft. The Fool has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 20, 2010, at 6:04 PM, ecoloney wrote:

    Owning GE: I've had GE for 10 years. It went nowhere even before the recent downturn. -should've put my money into a growth stock instead.

  • Report this Comment On January 20, 2010, at 7:25 PM, xetn wrote:

    "It's true that the S&P 500 index fell an alarming 24.1% over that particular 10-year stretch. But someone who invested $100 a month in the SPDRs (an exchange-traded fund that tracks that index) and reinvested dividends actually earned a total 5.9%"

    Just to be clear,a dollar in 2000 dropped in value by 24.59% by 2009. In other words, it took $1.2459 in 2009 to equal the purchasing power of $1.00 in 2000.

    So, where is that 5.9% gain? I guess in reality, you only lost about 19%.

  • Report this Comment On January 20, 2010, at 7:55 PM, mtracy9 wrote:

    Actually, the S&P only lost 0.9% over the decade, when you include dividends. The negative 24.1% comes from an AP story that excluded dividends, as it should not have. Trust the AP to get things wrong.

  • Report this Comment On January 20, 2010, at 8:27 PM, TMFBigFrog wrote:

    Hi ecoloney,

    As a many year GE shareholder myself, I certainly empathize with your position. The one bright spot, though, is that it does serve as a reminder of the importance of diversification. Even an industrial Titan like GE can stumble, and stumble hard...

    Regards,

    -Chuck

    (Disclosure: Yup -- still own GE)

  • Report this Comment On January 20, 2010, at 8:30 PM, TMFBigFrog wrote:

    Hi xetn,

    You are absolutely right that inflation ate into your gross returns, but that same inflation ate into your gross returns no matter how you were invested. Frankly, I would have much rather been invested somewhere that gave me positive gross returns than somewhere that gave me negative gross returns. After all, those positive gross returns at least helped soften the blow...

    Regards,

    -Chuck

  • Report this Comment On January 20, 2010, at 8:33 PM, TMFBigFrog wrote:

    Hi mtracy9,

    That is also another really good point... The act of receiving dividends over that 10 year period did significantly soften the blow from the decline in the index and helped investors who owned substantial stakes before 2000 better tread water.

    Thanks for calling it to our attention!

    Regards,

    -Chuck

  • Report this Comment On January 21, 2010, at 1:59 AM, pkluck wrote:

    True if you reinvested those dividends you did better, but you did have to pay taxes on them. And soon you will have to taxes on them at ordinary income rates. Which with state taxes included will be around 50% for a lot of investors. Gawd I love our Gov't.

  • Report this Comment On January 21, 2010, at 6:15 AM, CarryOnAgain wrote:

    Of course, if you use dollar averaging and reinvest the dividends along the way, you would make a nominal gain. But reinvesting dividends costs money. Even with a discount broker you've got to be looking at $10 for each trade. If your dividends are only a couple of hundred per year then I bet you'd come out breaking even at best.

    The idea that companies are going to continue to grow is a quaint one. I suspect growth going forward will be a lot less than what investors have been accustomed to. Expect a whipsaw market like 1966 to 1982.

  • Report this Comment On January 21, 2010, at 7:40 AM, TMFBigFrog wrote:

    Hi pkluck,

    You're right that if you did this in a taxable account, those dividends would be subject to tax. In a qualified retirement account (IRA, 401k, 403b, etc...), though, there would be no tax immediately due on the dividends.

    Regards,

    -Chuck

  • Report this Comment On January 21, 2010, at 7:40 AM, wjcoffman wrote:

    "Even with a discount broker you've got to be looking at $10 for each trade."

    You can participate in a company's DRIP (dividend reinvestment plan) like the ones that XOM, PEP, ABT, and AFL offer and dividends are reinvested free to the shareholder. I have an IRA with a discount broker and reinvest dividends of T and HAS for free. (They don't publish a list of companies they'll do that for and you have to ask about them specifically.)

    I own shares of each company mentioned.

  • Report this Comment On January 21, 2010, at 7:43 AM, wjcoffman wrote:

    "there would be no tax immediately due on the dividends"

    If the IRA were a Roth there'd be no tax at all, right?

  • Report this Comment On January 21, 2010, at 7:45 AM, wjcoffman wrote:

    " there would be no tax immediately due on the dividends."

    If the IRA were a Roth there'd be no tax at all, right?

  • Report this Comment On January 21, 2010, at 7:46 AM, TMFBigFrog wrote:

    Hi CarryOnAgain,

    There are at least a handful of brokers that offer free dividend reinvestment. In addition, there are no-load index-tracking mutual funds that you may be able to buy without a commission and which also offer free distribution reinvestment.

    Regarding whether companies will grow again -- I do believe we will see a return to growth. It may not be tomorrow, but I do believe that it will happen. In addition, much of the rest of the world doesn't seem determined to hamstring its own economy the way the US is. Companies with strong international presences as well as companies headquartered elsewhere will have the opportunity to grow even if the US remains stagnant.

    Regards,

    -Chuck

  • Report this Comment On January 21, 2010, at 7:48 AM, TMFBigFrog wrote:

    Hi wjcoffman,

    Great points. Yes, many compaines offer fee-free dividend reinvestment plans. In addition, a Roth IRA offers tax deferred growth and the possibility of tax-free withdrawls if the money is taken out under qualifying circumstances.

    Regards,

    -Chuck

  • Report this Comment On January 21, 2010, at 8:25 AM, lemoneater wrote:

    Schwab offers free dividend reinvestment on any stock that allows dividends to be reinvested. Some of my foreign stocks don't do dividend reinvestment so I just pool the foreign dividend money until I have enough to buy some small growth stock.

  • Report this Comment On January 21, 2010, at 9:25 AM, 0123Abc wrote:

    It is also possible to buy from and reinvest dividends with the transfer agent for many stocks.

    Re converting standard IRA to Roth, tax makes it seem as though it might have been better to have just saved the money.

  • Report this Comment On January 21, 2010, at 11:15 AM, henryking54 wrote:

    <<But someone who invested $100 a month in the SPDRs (an exchange-traded fund that tracks that index) and reinvested dividends actually earned a total 5.9%.>>

    How did you calculate this? I'm having difficulty replicating your results.

    <<if that's the kind of returns you can get in the worst decade ever, imagine how well you can do in a more normal investing climate.>>

    I can easily imagine making less money using DCA in a low-volatility decade where the index is flat. DCA works best in a high-volatility market where you reinvest at low prices and the index subsequently bounces back. Academic studies routinely conclude that dollar cost averaging is inferior to lump-sum investing over the long term. You have cherry-picked the one decade where DCA performed better.

    <<Actually, the S&P only lost 0.9% over the decade, when you include dividends.>>

    Using the S&P 500 total return index (SPXT), I calculate a loss of 9.1%.

  • Report this Comment On January 21, 2010, at 12:13 PM, TMFBigFrog wrote:

    Hi henryking54,

    Regarding how I calculated that return, I used Yahoo! Finance's "adjusted closing prices" for SPY, based on buying at the close the first trading day of every month. The "adjusted closing price" is the best easily available estimate I've been able to find for modeling dividend reinvestment.

    I picked that particular 10 year date range because that's the exact 10 year date range that has been called "the lost decade" and a terrible time to have been invested. If you think that range was cherry picked, the fault sits with those who insist on using that particular 10 year range to bemoan how lousy investing is/was/has been. In my opinion, it has been pretty obvious since the Nasdaq/tech bubble burst in early 2000 that the decade-over-decade comparisons would likely look ugly...

    Regarding academic studies, well -- they're the same group of people whose market theories purport to believe real world situations like this are impossible: http://www.fool.com/investing/value/2010/01/14/this-stock-is... . In addition, regardless of whether lump sum investing may beat dollar cost averaging over time, the reality is that most ordinary people don't have giant lump sums to invest. Real people's investing strategies revolve around their available cash every paycheck/month/quarter/year. Their behavior will look closer to dollar cost averaging than lump sum investing, no matter what the academic theories would suggest could be superior.

    If you have further questions about the data used to calculate those returns, please feel free to email me via the link in the signature line at the bottom of the article itself (above all these comments). I'll be happy to share the spreadsheet with the downloaded price data and calculations with you.

    Regards,

    -Chuck

  • Report this Comment On January 21, 2010, at 5:53 PM, marc5477 wrote:

    Lost decade is relative to whom you are refering to. Old investors lost but new investors gained what the old had lost. The net change was 0 + however much money was printed or retired. In my case, I loved the last decade was fantastic thanks to the fallouts in 2000, 2008 & 2009.

    As a side note: although index investing is relatively safe, I believe that its a waste of time on its own. If all you are trying to do is be safe just pour your money into 4%-6% CD's, re-invest, and be done with it. Over time you will perform with the major indicies and you will be much more stable. If more people had done that, the "lost decade" would have never materialized.

    If you are going to invest into the open market then you can easily outperform the indicies with 15 minutes of research a day but intelligence & luck plays a big part in your performance. Making money in the markets is a freedom we enjoy but its not a right nor an entitlement.

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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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