July 31, 2009, 5:37 am

Discouraging News about SP 500

by: The Financial Blogger    Category: Investment, Market and Risk
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On This Friday, my post won’t be too long as the chart will speak for itself (a picture is worth a thousand words.) 😉 One of my friends working on a trading floor sent me the following chart comparing 2 investors adding $10,000 to their investment account every January 1st from 1994 to 2008.

One person can’t stand market fluctuations, he decides to invest all his money into Certificates of Deposit. His annual yield is far from being astonishing, but he sleeps well at night.

The second investor thinks stock markets always go up and is willing to get negative yield from time to time. Hence, he invests his $10,000 in the S&P 500 every year.

So if both investors started investing $10,000 on January 1st from 1994 to 2008, who has the biggest nest egg today? The answer might surprise you:

>

Stocks vs Certificates of Deposit (1994 – 2008)

sp500-vs-cd

When I saw this chart, I was speechless. While my research shows that you would have been better off with a well diversified portfolio (i.e. investing in Canadian, US and International markets), it is still scary that a simple Certificate of Deposit can beat the most important stock market over 15 years….

On second thought, I am quite sure we will be getting a whole new perspective once these recent times have been factored in… Stats are made this way; they serve the one who puts them together…



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Comments

[…] The Financial Blogger has some discouraging news about the S*P 500 […]

I have to say I find this post less than compelling. A cursory glance at the graph would suggest that COD is only higher than the S&P for 2 of the 15 months (or 13% of time). The rest of the time the S&P was much higher. For a completely undiversified portfolio I would actually say this is pretty impressive. If you factor in an increasing bond allocation as you reach retirement age you would clearly be ahead with the S&P.

Does the graph include the reinvestment of dividends for the S&P 500?

Hey Frog,
good news and bad news:

Good news: you had a good question

Bad news: it does include dividends (it’s written on the graph)… no way out for the S&P 500 this time 🙁

by: aerosmith | July 31st, 2009 (12:14 pm)

How come this is discouraging? I see the dip lasting only for about a year or so. But afterwards the market’s value look good.

Does this only show the value of the S&P 500 at the end of 2008, it looks like it does? If so, then wouldn’t it be slightly higher now? The S&P 500 closed 2008 at 903.25. As of this moment it’s trading at 989.58. Assuming the person investing in the S&P 500 didn’t withdraw anything from the market his holdings would still be below the certificate of deposit investor – but he’d be gaining fast…

I still think that over the super long run (20+ years) and almost always over the regular long run the stock market will beat anything else. As much as people like to say what happened in 2008/2009 was unprecedented, it really wasn’t. The crash was the result of a bubble (people say the housing bubble, but I like to call it the debt/greed bubble – which is what it really was) bursting. It’s happened before – look at the dot.com bust – and it will happen again. This one was just really bad because it impacted so many businesses, but the overall idea of a bubble bursting and causing the stock market to decline is nothing new! Plus, it’s pretty obvious now that people overreacted (shocking!) during the crash causing the entire market to become undervalued, which is why we’re seeing such huge gains since March. Granted, there’s a good chance that we are overreacting again and overvaluing the market… but such is the nature of the human animal.

great chart

It means that S&P index is undervalued, given the risk with stock market compare to COD. Definitely means it’s oversold!

I agree – stats are made to serve the person who put them together – but hey – I like your comparison.

Anyway – bottom line is neither the stock market nor cd accounts are better than the other, it all depends on the market at that given time.
Say what if tomorrow stocks soar it would be way better than a cd account.

by: Mockingbird | August 1st, 2009 (1:12 am)

Pretty much correct for the S&P numbers
Thanks for the interesting graph.

“.. they serve the one who puts them together…”
Agree 🙂

Another worring look into the lost decade of the US stock markets through one simple chart. An important lesson to all of us. Maybe the better 15 years are about to start…

[…] interesting graph published by TFB comparing the return of the S&P500 to cash deposits..! -Zach looks into the […]