If you like to read about the stock market you may have
seen some recent articles about the so-called bull market
we have experienced over the last 5 years. One of the
problems with looking at the market with such a short term
view is we fail to see the whole picture.
I liken it to the horse wearing blinders effect. Not that I
get out to the horse races much but if you have ever been
to one you will notice that they put these things called
blinders on the horse's eyes so they will not get
distracted during the race. Well sometimes human nature
acts just like those blinders and we tend to only see what
has happened lately. This is exactly the case of the
mythical 5 year bull market and this phenomenon can be very
dangerous to the novice as well as the experienced
investor. Let me explain.
First let's look at this so called bull market and why it
has been deemed as such. Going back about 5 years ago to
September 30, 2002 the S&P 500 closed at 827.37. Flashing
forward just a little over 5 years to October 8, 2007 the
S&P closed at 1,554.41. If you do the math that equals an
attractive annual growth rate of 14.19% per year. Wow you
might say, what's wrong with 14%, sign me up! The problem
is this is not the whole story. In fact this is a dangerous
story if market makers and mutual fund promoters use this
information to influence countless investors to invest in
the market without considering the true risks and the
effects these risks will most likely have on their returns.
Let's take our blinders off for a moment and consider the
long term implications of this mythical market.
What if we were to go back just two years more to the year
2000. In fact let's go back to January 3, 2000 when the S&P
500 index closed at 1,441.47. Let's assume that this just
so happened to be the date that you decided to invest your
hard earned money into the market. Would you still be up
14.19% per year on average? Hardly. In fact you would have
spent two years with a stomach ache watching your money
decline as the market dropped to the bottom on September
30, 2002. In fact you would have lost 42.6% of your
investment. Could you afford to lose that much money in so
short a time?
But some may argue that this was only a paper loss and if
they would just hang in there until the market rebounded
they would be fine. The truth is the market did rebound but
with what effect?
If you would have invested your money directly in the S&P
500 on January 3, 2000 to October 8, 2007 for a little over
7 years your compounded annual growth rate would have been
.96% during the entire period. Not even one percentage
point.
Now that is a market that suddenly does not look so bullish
does it? And all we did was look back an additional two
years. What if we looked ahead?
What would the S&P 500 have to do over the next 26 months
so that by 2010 this hypothetical investor could actually
justify all of the risk that he just took over this 10 year
period?
If by the year 2010 the market increases by 50% this lucky
investor will have an effective 10-year rate of return of a
whopping 4.20%!
The bottom line is that the next 3 years have to be
phenomenal just to provide long term investors with
somewhat competitive returns. Returns that they could have
otherwise achieved with much less risk and much more
certainty.
So while the 5 year bull market did happen for a lucky few,
chances are if you have been a long term investor over the
last seven years you have barely broke even. How much
better off could you have been if you had invested in
safer, less volatile, or even risk free alternatives.
Before you get ready to listen to the market makers or
mutual fund marketers make sure you know the facts. Don't
get sucked into the hype of the mythical 5 year bull
market. If you are not sure exactly how well your
investments are doing you may want to seek out the
assistance of a qualified advisor who can tell you not just
what your fund has averaged over the last 5 or 10 years but
who can help you analyze what your true return has been and
if you are as far ahead as you think or if it may be time
to reevaluate your holdings. While blinders may work well
for horses they can be devastating to investors.
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Antonio Filippone is a respected speaker on a wide range of
subjects. He has been published in the official journal of
the IARFC as well as interviewed on the Radio about his out
side the box financial strategies.Readers who are
interested in gaining more information on how to live debt
free and truly wealthy can request a complimentary copy of
Mr. Filippone's booklet by visiting his website at
http://www.tonyfilippone.com
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