CAST YOUR MIND BACK 10 years—to Oct. 3, 2011. There was a fire-sale on Wall Street. Two months earlier, brinksmanship on Capitol Hill had culminated in Standard & Poor’s first-ever downgrade of the U.S. government. Meanwhile, Greece was on the verge of collapse, prompting the European Central Bank to take extreme measures to combat the region’s debt debacle.
It was a scary time. But—as is so often the case—the dire stories on financial television marked the beginning of a great period for long-term investors. On this day in 2011, the S&P 500 closed at 1,099, before touching an intraday low of 1,075 the following morning. While late 2008 and early 2009 garner the most notoriety among recent major market plunges, October 2011 was another great buying opportunity.
A decade ago, the world had emerged from the 2007-09 Great Financial Crisis. Corporations were once again turning profits. The S&P 500’s price-earnings (P/E) ratio, currently 34, was near 13 after stocks cratered 20% from that year’s second-quarter peak. U.S. small-caps and foreign markets experienced even greater declines, down closer to 30%.
Fast forward to today, and investors have (not surprisingly) been handsomely rewarded for buying then. Vanguard Total Stock Market ETF (symbol: VTI) sports an annualized 10-year total return of 17%. That means $10,000 invested on Oct. 3, 2011, is now worth more than $48,000. Not too shabby.
Non-U.S. stocks, appreciating at an annual clip of just 8%, have badly underperformed during that stretch. Still, foreign shares’ paltry return rate—compared to U.S. stocks, that is—beats the pants off Treasury bills, which have yielded a measly 0.5% per year. Meanwhile, inflation has averaged 2%.
While the current investing climate is fraught with handwringing over high P/E ratios, history tells us that stomaching today’s seemingly expensive prices will likely still be a good move when we look back 10 years from now.
Don’t believe me? Since 1926, an investor who owned the S&P 500 stocks would have experienced positive total returns in a whopping 94.8% of all 10-year stretches. Could this time be different? Sure. But it isn’t likely. Staying the course is the wise play, even after the incredible run since the glory days of October 2011.
I’m a believer in staying the course, and rebalancing.
What to do with a five year timeline? 🙂 The charts are not as predictable. Thanks.