Do I understand correctly that while index funds (based on S&P or Dow Jones) generally go up, it might take a decade?

Question

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?

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

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).