SPX Real Returns

To answer this week’s question — were the highs in July really new highs? — I will feature charts showing the real (inflation adjusted) value of the indexes in comparison to the actual, nominal number.

Last month, some of the major indexes made new highs, but in my return question — how did these new highs affect your portfolio value? — the performance and value are not the same. A new market high is meaningless unless you locked in your gains.

New market highs are not market tops until profit taking occurs. I am excited to see investors with excellent returns and more important outperforming the market. After getting pummeled in 2000 and 2008, many needed a multiyear Bull Run just to get back to even. Ask yourself a simple question: Why did you invest in the first place? I am certain most did not invest just to break even.

We are told by Wall Street to invest for the long run and not to worry when the market drops/sells off because the market “will always return.” Look at the chart from Doug Short (dshort.com), and you will see that this may not be true, especially when the major indexes are adjusted for inflation.

Since I can only show one chart, here are the nominal percent changes from their 2000 highs — Dow 86.7 percent, Standard & Poor’s 500 61.7 percent, NASDAQ 25.7 percent. These are the numbers you normally see when looking at a performance chart. Unfortunately, since these are not adjusted for inflation, these numbers do not represent their true value. 

Earlier this year, I heard many reports of the indexes making new all-time highs. This is a true statement with the Dow and S&P 500 when using their nominal-actual values. This chart shows the “real” percent changes from their 2000 peaks, the inflation-adjusted “real” prices based on the CPI (excluding dividends). When we examine the “real value,” the returns — Dow Industrials 30.4 percent, S&P 500 12.2 percent and the NASDAQ still under water -12.2 percent.

So, here are action points to think about:

First, these results in no way represent all buy and hold results.

Second, not everything comes back. Long-term buy and hold and forget strategy is far from perfect.

Third, what if you had needed your retirement funds in 2003 or 2009 — how would that long-term strategy have worked for you?

Fourth, if in or nearing retirement, do you have a downside protection for each security?

Fifth, have you established alerts for your securities if they nose dive?

Sixth, if not, why?

Wall Street makes their money with us being in the market. We make our money with what we own and when.

Plan your work, work your plan, share your harvest!

DAVID O. ENGLAND is the founder of the Eye on the Market-Training Academy (Davidoengland.com) and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Your decision to buy, sell, short or hold any investment product is a direct result of your decisions, free will, and research. For questions-send to thetraderseye@gmail.com.


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