My company just sent out the performance numbers for all of the top indexes we follow; they do this each month to keep all of us in the know about how the market is performing. I was really surprised by what I saw.
I knew stocks were down year-to-date, but I didn’t realize by how much stocks have underperformed over the last 10 year period. The S&P 500 Index (large cap stock) has returned only 3.89%, and the Russell 3000 Index (total stock market) has returned 4.28% for the 10 years ending 4/30/08.
Of course that’s before taking any taxes or fees into account, meaning most people’s returns – even if they had their stocks sitting in a stock index fund from April 98 to April 08 – essentially were flat and certainly didn’t beat inflation.
What’s more, the Lehman US Aggregate Bond Index annualized a 5.96% return over the same period, outperforming both major US stock indexes.
Now of course if you’re only looking at the last 5 years of performance, stocks have performed rather well – 10.62% for S&P 500 and 11.40% for Russell 3000. Bonds were 4.37%. Then again over the last 1 year, both stock indexes have negative returns (-4.68% and -5.15% respectively) while bonds are up 6.86%.
We must keep in mind that stocks are down over the last 10 years mainly because 1998 was near the peak of the internet stock bubble, which promptly burst soon after. If we look at returns over longer periods such as 15 and 20 years, returns are solidly positive (I don’t have that data, or I would provide it).
The point is that investing in stocks is truly for the long term. People like to talk about the average 8-12% return over 5+ decades, but the truth is that stock market indexes do have long periods of negative and/or flat growth during their historically upward ascent. You might get lucky over a 3 or 5 year period, but the best thing to do is to invest in stocks only when your savings goals are truly long term.
But what exactly constitutes long term? If you are saving for a house or car or vacation or anything that you want to purchase within the next 10 years, you would be better off to invest in mid-term investments (bonds, 5-7 year time horizen) or CDs, savings accounts, or money market funds (1-4 year time horizen). If you’re shooting for something in the 8-10 year range, go ahead and bet on stocks if you like. But remember, it is a gamble.
More from Meg at The World of Wealth