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S&P 2000: A Bumpy Ride With Low Returns


The S&P 500 has been in a volatile grind since hitting 1000 in 1998.


There's a lot of fanfare over the S&P 500's close over 2000 for the first time yesterday.

Many market participants are looking back to the first close over 1000 back on February 2, 1998, when the S&P finished at 1001.27.

But what many folks are missing is that the market has been a volatile grind since then.

In the 16.57 years it took the S&P to advance one thousand points, the index (excluding dividends) has compounded at an annual rate of just 4.3%.

Lame! From 1970-1997, the compounded annual return for the S&P was 8.1%.

Now let's look at the last doubling of the S&P, from when it first closed above 500, to that first 1000 close on February 2, 1998.

It took less than three years -- 2.86 to be exact, from the 500.97 close on March 25, 1995.

As I showed in my recent post [subcription required] on long-term rolling returns, we've occasionally seen massive downward volatility in the past decade (2008, and 2000-2002), which underscores the importance of timing in the investment equation.

If you put $100,000 in the S&P at the end of 2007, you would have had about $125,000 (excluding dividends) at the end of 2013.

But if you put it in at the end of 2008 and missed the big slide that year, you'd have over $200,000.

So dollar-cost averaging (and actually increasing investment levels during downturns) probably works out well for many folks over the long run.

Plus, the big ups and downs in the market emphasizes an important lesson we can all learn from Warren Buffett: when times are bad, having liquidity means having opportunities.

We can't emulate his incredibly well-timed investments in Goldman Sachs (GS) and Bank of America (BAC) during the financial crisis.

But what we can do is remember that over the long run, putting cash into equities and other risk assets is most lucrative during times of crisis.

Now's the time to start thinking about potential scenarios and plans of action.

To avoid the Lehmans and Bears, stick with ETFs, mutual funds, closed-end funds, and other diversified instruments.

Twitter: @MichaelComeau


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