Call Me Stupido

Every now and then I hear from a disgruntled reader. Like today, when a message in my inbox bore the subject heading "hey stupido." The criticism leveled at me was short and sweet, though it wasn't clear which of my many stupid articles was being referenced. Here's what the reader wrote:

"Anyone who left money in the [New York Stock Exchange] for the last 12 years hasn't made 10 pennies, and the inflation has erased 70% of it's [sic] value. Timing is everything, just how stupid do you think the public is, dummy."

His note got me thinking. For starters, he's wrong about inflation. I found that what cost $100 in 1997 costs about $132 today. So, inflation has indeed taken a big chunk out of the value of our money, but not as big a chunk as he suggested.

Inflation is just a fact of life, though. It has averaged between 2% and 4% for most of the past few decades. Ignoring it is reckless, as it will shrink the value of poorly assigned investments. But it can be overcome with bonds that factor in inflation, with stocks in companies that hike their prices in step with inflation, and so on.

Those 10 pennies ...
Still, he's right that the stock market hasn't done well over the past 12 years. I looked up its performance in that period, as reflected by the S&P 500. It turns out it's down 7% since February 1997, not including dividends. That's not 70%, but it's not great, either. Over more than a decade, I think most of us would like to see our investments grow, not shrink! But big downturns like this do happen. That's just part of the risk one takes when investing in stocks.

I don't mean to be too cavalier about it, though. Investing is usually serious business, as many of us are counting on its returns for our retirements. (Do you even stand a chance of retiring?) But maybe the picture isn't quite as dark as he suggests. Check out the S&P 500's total gains over these different 12-year periods:

Data: economagic.com. As of end of year. Does not reflect dividends.

As you can see, shifting your 12-year period a little in one direction or another, by just a year or two, can make a huge difference. It's terrible that those who invested in the S&P 500 a dozen years ago lost 7%, but here's some comfort -- typically, returns over so long a period have been much higher.

In addition, while 2008's market plunge of about 40% was devastating for anyone who had to sell in that year, remember that most of us, including those in retirement, wouldn't have had to sell everything. We usually withdraw sums gradually over time, as needed. So, our remaining money would be able to recover as much as possible before being taken out.

Stocks, too
Even individual stocks show great differences in performance over different periods. Check out these examples of total returns from a few of the 30 companies in the Dow:

Data: Yahoo! Finance.

Since we never know exactly how any investment will fare over any given period, it can be effective to just keep adding to your stock holdings over time. (And this is actually a particularly appealing time to buy.) The reader who wrote to me was correct when he said that "timing is everything," but he's wrong if he thinks anyone can successfully and consistently time the market. Even Warren Buffett recently noted, in his latest letter to shareholders:

We're certain ... that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall.

Now that's a letter I'll put more stock in.