Patience Pays Off in a Market Slump

My Point of View

Patience Pays Off in a Market Slump

Whatever your style of investing, the lesson of the millenium is clear: It pays to keep investing through market slumps.

 No doubt about it: The first decade of the new millennium -- the '00s, which I call the aughts -- has not been kind to investors who take an indexed approach to owning blue-chip U.S. stocks.

With 18 months still to go in the decade, Standard & Poor's 500-stock index, which mostly tracks gigantic U.S. companies, in dozens of industries, is slightly below its December 31, 1999, close of 1469. As I write this, in mid May, the index is down 5% for 2008.


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I expect the S&P 500 to claw its way back into positive territory later this year, and there is reason to believe it will do better in 2009, as U.S. companies recover from the current earnings slump.

All the same, that won't be enough to save this decade from comparison with the 1970s, a real bummer of an era for stocks. During that high-inflation decade (and for a few years before and after, from 1966 to 1982), the S&P 500 essentially stagnated.

Lousy numbers

On a nominal basis, investors in a large-capitalization index such as the S&P 500 actually made a tiny bit of money this decade. The S&P has produced a positive return (including dividends) of 1% annualized. Taking inflation into account, though, the index has lost money.

During the aughts, the S&P has badly trailed the gains posted by virtually every other asset class: U.S. small-company stocks (9% annualized), stocks of developed foreign markets (6%), commodities (16%), real estate investment trusts (17%), even long-term Treasury bonds (8%). No wonder the Wall Street Journal recently dubbed the aughts a "lost decade" for investors in large U.S. companies.


I think that moniker is too harsh, and here's why: The lackluster 1% annualized return of the S&P over the past nine years pertains only to money someone had in the index in late 1999 or early 2000, at the top of the overheated stock market of the late '90s. And it assumes that investors didn't add anything to their index-fund holdings through the ensuing nine years.

But index buyers tend to be, by temperament, long-term investors who replenish their accounts on a regular basis, in markets good and bad, using payroll deductions and dollar-cost averaging. Many of them had the discipline to maintain their index investing through the carnage of 2000-02, during which the S&P fell almost 50%. So they enjoyed healthy gains on their new money during the recovery that followed the last bear market: 29% in '03, 16% in '06, 11% in '04, 6% in '05 and 5% in '07.

What about investors who don't practice indexing -- that is, the ones who pick their own stocks or use actively managed mutual funds, of the kind we follow in this magazine?

A lot of them, even those who focus on large-company stocks, have done well in recent years. While the rising tide of the '90s lifted most boats, favoring index investing, the trickier currents of the aughts have rewarded clever stock pickers.


Whatever your style of investing, the lesson is clear: It pays to keep investing through market slumps, such as the one that began last fall.

Mix it up

And it pays to spread your money over several asset classes. That means owning attractively priced stocks of companies large and small, U.S. and foreign, and holding for the long term. For income, you can mix in some real estate investment trusts -- also a better value now that commercial real estate has cooled down. Today's high prices for Treasury bonds will suffer when interest rates eventually rise, so content yourself with modest current yields and don't expect capital appreciation.

If you're itching to try your hand at commodities, use an index fund, not futures trading -- and be careful. I think most commodities, including oil and gold, are very overpriced, even allowing for strong global demand. The big gains are behind us, and the risk of a bursting bubble is high.

Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance magazine and of The Kiplinger Letter and