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Thu Dec 2, 2021, 04:26 PM

Word to the wise: the crash is coming, get out of the stock market now ⚠ 👀 😱 [View all]

Last edited Mon Jan 3, 2022, 07:53 PM - Edit history (1)

I've been hearing "the crash is coming" ever since 2014 or so, and "that's why I stay out of the Wall Street Casino" ... "The House has the edge" and so on.

So, I decided to see what would have happened if some unfortunate soul had ignored the advice of the coming crash and went to the "Wall Street Casino" and had invested in an S&P 500 index fund at the worst possible time, October 9, 2007, at the very peak of the Housing Bubble market just before the worst crash since the Great Depression (The Housing Bubble crash resulted in a 57% decline from peak to trough).

Le's see how the unfortunate soul did:

From 10/9/07 to yesterday's 12/1/21 close:

S&P 500: went from 1,565 to 4,513 for a 7.77% annualized return just on the price appreciation (i.e. throwing away the dividends)

VFINX adjusted for dividends: from 110.07 -> 417.52 for a 9.88% annualized return (note the near-quadrupling in just 14 years)

VFINX is the Vanguard S&P 500 Index Fund -- the results above are the real-world results of what Six Pack Joe or Jane would have gotten -- they are after fund expenses. It's not "theoretical" at all, it's what someone would have gotten had they invested in 10/9/07 and sold on 12/1/21.

I pick the S&P 500 because it is about 80-85% of the U.S. total market and the benchmark of the U.S. market that is most commonly used by professionals (the Dow is better known but is far less representative of the U.S. equities as a whole). And the one that Warren Buffett has recommended to anyone who simply wants to have an equity stake and that doesn't want to do research on individual stocks or sectors.

As for the "House" having the edge, no doubt -- I feel the same way when I look at the alternatives, e.g. for CD's or bonds to buy -- like 1.0% on a 4 year CD, 2.2% or so current yields on intermediate-term bond funds. Or a money market account of savings account paying 0.10%. But that's just me I guess.

As for where I got the numbers, it's from Yahoo Finance Historic Data:

VFINX: https://finance.yahoo.com/quote/VFINX/history?p=VFINX

For VFINX, the "Close" column is just the price, i.e. it doesn't include dividends.

Whereas the "Adjusted Close" column is adjusted by reinvested dividends and other distributions.

S&P 500: https://finance.yahoo.com/quote/%5EGSPC/history?p=%5EGSPC

As for the S&P 500 index, it's just the index value. Close and Adjusted Close are the same, i.e. there isn't a version of the S&P 500 index that includes dividends.

Anyway, what matters is the total return that includes dividend reinvestment: 9.88%/year. And remember that's someone investing at the worst time -- the peak before the Housing Bubble crash.

Yeah but it's just a few percent more, I'd rather sleep at night etc. etc.

Well that's understandable, but if you need some of your retirement savings to live on after you retire -- what matters is whether you'll run out of your retirement savings money before you die, and countless simulations show that the likelihood of that occurring is far higher with an all fixed income portfolio than with one with a mix of equities and fixed income.

Over time, a 9.88% annualized return, if maintained, doubles one's investment every 7.4 years, quadruples in 15.8 years, 8-folds in 22.2 years etc. The magic of compounding.

Whereas if one is lucky to get and maintain a 3.00% total return in bond investments, that takes 23.4 years to double, 46.8 years to quadruple, 70.2 years to reach 8-fold, etc.

BTW, the VFINX returns would have been much higher if the person had invested at the very best time -- the bottom of the crash, on 3/9/09 when the S&P 500 bottomed out at 677. VFINX's adjusted close on that date was 49.25. So from that point to 12/1/21 close, VFINX with dividends reinvested would have gone from 49.25 to 417.52 in 12.73 years, that's an 8.47-fold increase -- that's an annualized return of 18.28%

(An 18.28% annual return results in a doubling in 4.1 years, a quadrupling in 8.2 years, an 8-folding in 12.3 years etc.)

Here's another metric:

The VFINX S&P 500 index fund has had an average annualized return of 11.62% since its August 31, 1976 inception to 11/30/21, per

(see: "Life of Fund" )

During that time (8/31/76 - 11/30/21), it went up 144 fold. Yes, that's what a 11.62% return over 45.248 years compounds to.

A 7% return in bonds during that same period would have resulted in a 21.4 fold increase.

A 4.62 percentage point annual return difference is the difference between having $144,000 and have $21,400 on a $1,000 investment over 45.248 years.

A VERY LATE EDITED TO ADD, 1/3/22 - bucolic_frolic made the very good point that the stock market is undoubtedly being buoyed up by years of $trillions of bond-buying by the Federal Reserve to reduce interest rates. So the 9.88% annualized rate of return between the housing bubble peak and December 1 value is higher than if the Fed wasn't pumping in all that stimulus.

So, I figured what if the market is, say, 50% overvalued? i.e. instead of a "3" value, it should be a "2" value? I figured the rate of return after the market adjusted back to the "2" would be a still very nice 6.84%/year annualized average return. (I used the Vanguard Total U.S. Stock Market Index fund VTSMX rather than the S&P 500 fund for this calculation, but would be very similar for the S&P 500 fund ). And again this is for someone investing at the very very worst time -- the peak before the housing bubble crash.

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