Saturday, March 19, 2011

Resilience in Military and Markets

It was eight years ago today (March 19 in the US, March 20 in Baghdad) that the bombing which initiated Operation Iraqi Freedom started.  When I recently read that I thought of the sacrifices and heroism of our men and women overseas and I'm grateful to live in the greatest country in the world.  Let's not think of our servicemen only on Veterans Day and Memorial Day - thank a soldier today.

In thinking of the significance of the war and how much time has passed since it started, I also thought of how significant the changes in our financial world have been over that same time.  When the war started we were coming out of the worst bear market since the early 70s and one that rivaled the Great Depression for the depth of market losses.  Since that time think about all the terrible things that have happened in the financial world:
  • the war in Iraq has continued to drag on
  • oil spiked up to $140 per barrel
  • housing prices have tanked, dropping as much as 50% in some markets
  • Bear Stearns was bailed out by the government
  • Lehman Brothers wasn't bailed out and went bankrupt
  • AIG, the largest insurance company in the world, had to be bailed out
  • Fannie Mae and Freddie Mac had to be taken over by the government to avoid bankruptcy
  • unemployment reached double digits for the first time in 30 years
It has truly been a difficult time to be an investor during the past decade.  But a closer look at market performance shows the resiliency of capitalism.  The S&P 500 back in March 2003 was just below 900, closing on 3/20/2003 at 876.  After all of those terrible events in the interim, today the SP is just under 1300 - an increase of around 5% annualized.  And that's on price-only basis, dividends which historically account for about 1/3 of market returns are not included in the index levels.

And that's also on an undiversified US large cap only basis; over the past eight years globally diversified index fund portfolios have returned in the 7-12% range (annualized including dividends) depending on the mix of stocks and bonds being considered.

Capitalism does work, and to participate in the gains inherent in capitalism one need not pick the best stocks, or hottest funds, or anticipate interest rate changes, or time the market to get out when it goes down and in before it goes back up, or pay attention to any of the myriad 'new normal' or 'this time it's different' media fallacies.

All we need to to is be invested and be patient.

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