By Doug Short
Note: We've updated the charts below based on monthly data through the December close.
Here's an interesting set of charts that will especially resonate with those of us who follow economic and market cycles.
Imagine that five years ago you invested $10,000 in the S&P 500. How much would it be worth today, with dividends reinvested but adjusted for inflation?
The purchasing power of your investment has increased to $17,357 for an annualized real return of 11.08%.
Fun Runs of the Roller Coaster
Let's increase the time frame to 10 years. The annualized return is considerably smaller. As of the end of last month, your $10K invested 10 years ago has grown to about $16.82K adjusted for inflation, an annualized real return of 5.21%.
As these charts illustrate, and as many households have discovered during the 21st century so far, investing in equities carries substantial risk. Households approaching retirement should understand this risk and make rational decisions about diversification. In the past, we've suggested that they should also consider fixed income alternatives for that part of the nest egg that will pay non-discretionary expenses not covered by Social Security and pensions. Unfortunately, this traditional wisdom has been less helpful in recent years owing to the Fed Zero Interest Rate Policy (ZIRP) and various stimulus strategies, which have collectively shrunk interest rates. With ZIRP now ended and the first Fed rate hike now in effect, it will be particularly interesting to see how this slow-motion roller coaster plays out in the years ahead.