Tuesday, April 12, 2005


The Worst 10 Years

Recently when I was discussion Social Security reform with a friend, he concluded that because the stock market always outperforms savings bonds we should have private accounts for Social Security. I agreed with him that the market outperforms bonds over the long haul but that that it didn't always do so well in the short term. He replied saying that the worst the market has done in a 10 year span is something like 10%. He was pretty close; the worst 10 year period for the market was 1965-1974 in which the market had a total return of 12.3% for an annualized return of 1.2%.

The highest close for the S&P 500 was 1527.46 on March 24, 2000. Today the S&P 500 is around 1187.76. For the index to have a 10-year return of 12.3%, it needs to increase 44% to 1715.33 in the next 5 years. This rise would represent an annualized gain of 7.7%.

The lowest year end close Dow Jones Index has ever experienced was around 60 in 1932, in the midst of the Great Depression. The increase from 60 points to today's 10507.97 is a total gain of 17413.28%, or an annualized gain of 7.4% for 72.25 years.

In summary, the stock market will have to outperform at least one major index's long term average in the next five years to prevent 2000-2010 from being the market's worst decade.

Simply from a statistical perspective, I would expect the market pendulum to swing back to the black significantly over the next half decade, beating long term averages and annulling this post.

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