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This is probably a simple question, but I don't know much about investing, so here goes:

Some time ago, though I can't find it again now, I read a couple of responses on this site saying that these index funds historically only "lose" for very short times, as far as I can remember they said that they always recover within a year or two even after a large market crash.

However, looking at the graphs for S&P and Dow Jones on Wikipedia, that seems wrong. In fact, it seems that if someone invested in an index fund based on S&P 500 around the year 2000, they might have been in a loss until around 12 years later (unless they exited within a short time during late 2007 / early 2008, and possibly not even then if corrected for inflation). Am I correct in reading these graphs at face value, or is this dependent on some other information and the actual value did rise faster that the graphs indicate?

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    Yes, you do. Why would you doubt that? Commented Mar 28, 2022 at 20:21
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    Meanwhile the Nikkei index is still down on it's 1989 peak, three decades later. Commented Apr 3, 2022 at 15:02

5 Answers 5

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Historically, 20 year market returns have always been positive but there have been a number of 10 year periods where it lost money. The most recent one was from 2000 to 2009 and is called the Lost Decade (a loss of about 7% for the SPY). For someone who invested at the end of 1999, it took almost 11 years to break even. The DJIA fared a bit better, breaking even in about 9-1/2 years.

The accuracy of your two graphs depends on if they accounted for dividends. While it's not a huge amount, the SPY yielded an average of about 2% during that decade.

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    Here's something that an awful lot of investors have no clue about. Dividends do not offset anything because they do not provide total return because on the ex-dividend date, share price is reduced by the exact amount of the dividend. Read this. Though taxed as income, they are not true income. Your account will not be worth more because you became eligible to receive one Commented Mar 27, 2022 at 17:46
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    The reduction because of the dividend is permanent. If there is a dividend of $2 on the ex-div date then share price drops $2 because of it. After that, share price can go up or down but that is a separate issue. And if you are so inclined, you can observe this for every stocks that offers a dividend. Commented Mar 27, 2022 at 20:38
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    "Historically, 20 year market returns have always been positive" in the USA, yes. Some other countries haven't been so lucky. Commented Mar 28, 2022 at 17:44
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    "Dividends do not offset anything because they do not provide total return because on the ex-dividend date, share price is reduced by the exact amount of the dividend." The point of bringing up dividends is that indexes don't account for the value of dividends that would be paid if you owned the underlying stocks. If you buy an instrument (mutual fund or ETF) that tracks such an index, you may or may not receive that value as a distribution that you have to reinvest yourself; or you may be able to set up an automatic reinvestment; or it may be reflected in the value of the instrument. Commented Mar 29, 2022 at 4:50
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    @BobBaerker: My point is that the same applies to the ETF itself. When it pays the dividends forward, the ETF price goes down. But when an ETF receives and reinvests dividends, that ETF price does not go down. For most ETF's, the chosen strategy is fixed when that ETF is initially created.
    – MSalters
    Commented Mar 29, 2022 at 13:11
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There are no guarantees on either the short or long term that any investment will continue to rise. That has just been the general trend historically. You can always take any two arbitrary dates and show that a strategy was brilliant or stupid, but you are still looking at the short term volatility. Contrary to what you may believe, 8-10 years is not the long term. You could have just as easily picked two other dates to prove the opposite. However, try that on a 20 or 30 year horizon and the trend becomes clearer.

Also, consider that most people invest gradually over time. They don't just drop a bunch of money in at year X and then take it all out at year Y. You would likely have been investing during those dips and seen pretty good returns on that money that evened things out.

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  • Thanks. I had not considered that last point of investments being done over time instead of once in and once out.
    – ispiro
    Commented Mar 27, 2022 at 16:43
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    Periodically adding more money on a regular basis during the Lost Decade of 2000 to 2009 would have shortened the breakeven period. Commented Mar 27, 2022 at 17:47
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    You ended with a loss, if you started investing regulary in 1999 and stopped investing in late 2008. Commented Mar 27, 2022 at 18:14
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    @BernhardDöbler Sure, but hopefully you invested gradually over that time period and also sold gradually over that time period - in which case you still made out pretty well. If you sold your house on Jan 1 1999 and put all the money in there, and then needed to buy a house in 2008, I guess you're out of luck, but that's just poor money management.
    – Joe
    Commented Mar 28, 2022 at 16:28
  • @Joe so I should invest and uninvest at the same time? Or was the idea that I should plan ahead on when I need the money, and then gradually uninvest before that? Commented Mar 28, 2022 at 23:49
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The "ten year" rule is not "you're guaranteed to make money in ten years", it's rather that "in a less than ten year period, invest more cautiously, in a ten or more year period, invest more aggressively," because normally 10 years is indeed enough to likely avoid any major crashes.

The 1999-2001 crash was exceptional, but mostly because the 1994-1999 period was also exceptional - the amazing growth of that period (tripling over five years!) caused by both lax regulations around speculation and a lack of understanding of the actual value of tech stocks. Yes, a 1999 investment would have taken a long time to show growth - but a 1997 investment would have been fine (around 700 for S&P, the 2008 crash only barely touched that and very quickly recovered from it to see a reasonable gain from that 1997 investment).

It's very, very unlikely that today is the peak of the bubble, and hence the advice that a ten year horizon is long enough to mostly disregard that possibility - and I can tell you that there were tons of people in 1996-1997 warning of the bubble (that was, of course, actually a bubble!) who, if you listened to them, you still lost out on tons of gains.

A 10-year rolling return chart is the better way to visualize this to fully understand what's happening here - in particular due to the insane growth in the 1990s making it very hard to see what happened in the prior periods (all of which are consigned to a more or less straight line on the S&P price chart due to resolution). And to add to that, recognize that the strategy for retirement would be to start moving out of the stock market around 10 years before retirement, with a more aggressive move out at 5 years - so even if you were heavily in stocks and retiring in that 1999-2008 period, you'd still be selling a ton of stocks at a gain during the peaks.

The real lesson is "don't plan to sell everything at once" - have a multi-year plan to slowly move from stocks to more safe investments.

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  • Thanks. But it seems that the graph you linked to is not inflation-adjusted. Do you have a similar graph that is by any chance?
    – ispiro
    Commented Mar 28, 2022 at 16:43
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    @ispiro I'm sure you can find one, but for the most part you don't adjust for inflation in ten year windows like this - the percentage itself is not affected by inflation, just the relative year-to-year change, and most 10 years periods don't have enough inflation for it to be very significant (Late 1970s aside).
    – Joe
    Commented Mar 28, 2022 at 17:41
  • @ispiro Rolling 10 year real returns from 1800-2021. Whether you should correct for inflation depends what you want to visualize. If you want to see the effects of both inflation+stocks then use nominal prices. If you want to plot real growth in purchasing power, then use real prices. (If you don't correct for inflation, then Zimbabwe would be considered one of the best investments of the last 20 years...)
    – bain
    Commented Mar 30, 2022 at 9:35
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It could take a lot longer

The US is something of a special case, having had large and relatively steady growth for over a century.

There is no guarantee this trend will continue.

There have been times when investing in the indexes of other major economies (Say 1980s Japan) would have taken 20-30 years to see a positive return.

Others, where you end up losing almost everything and never really recover.

Nothing is ever guaranteed or predictable. Especially in finance.

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  • Another example, iirc the German stock market had two complete wipes in the first half of the 20th century. So if you were in the stock market when one of those happened, your money was just completely lost.
    – quarague
    Commented Mar 29, 2022 at 9:45
  • @quarague You might confuse that with the currency. In 1923, the "old" Mark was replaced with the "Rentenmark" by 1,000,000,000,000:1 (one trillion!). In 1948, the "Reichsmark" (which was quite the same as the "Rentenmark") was replaced by the DM by about 10:1. But the shares kept their value across 1923. According to this Wikipedia article (in German only, alas), trading with shares ceased in 1943 and started again in 1948 with about 10% of their value and only gained their 1943 level in 1954. So not a complete wipe.
    – glglgl
    Commented Mar 29, 2022 at 10:26
  • @glglgl Thanks for the link, no complete wipe but it still seems most of the first half of the 20th century was a bad time for investing in the German stockmarket.
    – quarague
    Commented Mar 29, 2022 at 10:30
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The book Irrational Exuberance 3rd ed. lists several historical periods where the real (inflation-corrected) market price took a long time to recover:

1901 crash:

"After 1901, there was no pronounced immediate downtrend in real prices, but for the next decade, prices bounded around or just below the 1901 level and then fell. By June 1920, the stock market had lost 67% of its June 1901 real value. The average real return in the stock market (including dividends) was 3.4% a year in the five years following June 1901, barely above the real interest rate. The average real return (including dividends) was 4.4% a year in the ten years following June 1901, 3.1% a year in the fifteen years following June 1901, and -0.2% a year in the twenty years following June 1901."

(the book does not state the exact year that the market recovered and exceeded its 1901 peak, but it was some time in the 1920s)

1929 crash:

"the market tumbled from this high, with a real drop in the S&P Index of 80.6% by June 1932. The decline in real value was profound and long-lasting. The real S&P Composite Index did not return to its September 1929 value until December 1958. The average real return in the stock market (including dividends) was -13.1% a year for the five years following September 1929, -1.4% a year for the next ten years, -0.5% a year for the next fifteen years, and 0.4% a year for the next twenty years."

(29 years from peak to recovery)

1966 crash:

"Real prices bounded around near their January 1966 peak, surpassing it somewhat in 1968, then falling sharply back after 1973. Real stock prices were down 56% from their January 1966 value by December 1974 and would not be back up to the January 1966 level until May 1992. The average real return in the stock market (including dividends) was -2.6% a year for the five years following January 1966, -1.8% a year for the next ten years, -0.5% a year for the next fifteen years, and 1.9% a year for the next twenty years."

(26 years from peak to recovery)

2000 crash:

"The Dow peaked at 11,722.98 in January 14, 2000, just two weeks after the start of the new millenium. The market had tripled in five years. Other stock price indices peaked a couple of months later. The real (inflation-corrected) Dow did not reach this level again until 2014, and, as of this writing, the real Standard & Poor's 500 index has still not quite returned to its 2000 level."

(14 years for the Dow to recover, at least 15 for the S&P 500, as the book was published in 2015).

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