The Independent Adviser for Vanguard Investors
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June 2016
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high point to varying degrees. Despite
all the color on the chart, over the near-
ly 60-year-long stretch, the S&P 500
Index grew at a 6.7% annual pace—for
a price return of 4,659%.
On just 6% of trading days was the
index actually making a new high. And
37% of the time, the index was within
5% of an all-time high. Flipping that
around, it means that more than half
of the time—57%, to be precise—the
S&P 500 Index was off its high by 5%
or more. Think about that. Even though
a long-term investment in the stock
market has paid off nicely, more than
90% of the time, an investor would have
been feeling some level of regret.
One other stat: The S&P 500 Index
(on a price-only basis) has actually
spent
three times as many days at levels
20% or more below its highs as it has
hitting a new high
. (It was 20% or more
below its high 20% of the time, com-
pared to hitting a new high on just 6%
of all trading days.)
We’ve all heard the disclaimer that
you can’t invest directly in the index,
and dividends do very much matter to
flesh-and-blood investors, so let’s look at
a real-world, investable example.
The top right chart shows the growth
of
500 Index
, including dividends,
since the end of June 1983. (There’s
nothing special about that date; it’s just
as far back as my daily total return data
goes.) Over the past 33 years or so, 500
Index grew at a 10.5% annual pace—
for a total return of 2,564%.
Including dividends in return calcu-
lations always paints a more realistic
picture, but in this case, it doesn’t
change the image much. As you can
see in the table below, when I include
dividends, the index fund spends more
time at or near highs and less time
materially below those highs. But still,
an investor in 500 Index would have
spent most days below a previous
high point. (I also ran the analysis on
the S&P 500 price index since June
1983 for reference—you can see how
including dividends boosted returns
and cut back on drawdowns over time.)
Whether you look at price return or
total return, U.S. large-cap stocks have
been treading water for the last year,
with some periods, like the early part of
this year, giving investors a fright. But,
if you are investing in the stock market,
you need to accept that you will be below
your most recent high point with great
regularity. To my way of thinking, pull-
backs and corrections just create oppor-
tunities to put money to work. With the
market off its highs, this is an excellent
time to add to accounts. I’d rather buy
below the highs than at the highs.
n
Vanguard 500 Index
Drawdown FromPrior High
5/84
5/86
5/88
5/90
5/92
5/94
5/96
5/98
5/00
5/02
5/04
5/06
5/08
5/10
5/12
5/14
5/16
5% down or more
10% down or more
20% down or more
500 Index
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
S&P 500 Index
Drawdown FromPrior High
5/61
5/66
5/71
5/76
5/81
5/86
5/91
5/96
5/01
5/06
5/11
5/16
0
500
1000
1500
2000
2500
5% down or more
10% down or more
20% down or more
S&P 500 Index
Being Down From Highs Is Normal
% of Time…
S&P 500 Index
Price Only
Since March 1957
S&P 500 Index
Price Only
Since June 1983
Vanguard 500 Index
Total Return
(Includes Dividends)
Since June 1983
At new high
6%
7%
9%
Within 5% of high
37%
41%
45%
5% down or more
57%
53%
46%
10% down or more
42%
40%
32%
20% down or more
20%
24%
18%
Cumulative return
4659%
1158%
2564%
Annualized return
6.7%
8.0%
10.5%
A long-term investment
in stocks has paid off,
but investors felt
regret more than 90%
of the time.
HISTORY
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