Melancholy Days for Investors (Bob Higgs)

Bob Higgs questions the conventional wisdom that the stock market is best long term method to acquire wealth:

My wife tells me, don’t watch. But like the passerby who cannot avert his eyes from the roadside debris and injured persons in the aftermath of an automobile accident, I can’t help myself. I keep checking the movements of the stock markets.

I still have some investments in stocks, even though I switched the bulk of my stockholdings to bonds back in January. (I felt like an idiot for waiting so long, but looking back, I feel somewhat better, knowing that at least I saved myself from the much greater losses I would have sustained since then, had I not made the switch.) On most days, my stock investments, though widely diversified, take a further beating. The odds that I will live long enough to recover these losses are slim to none. Yet I cling to a shred of hope that I will be wrong, that the market will recover in time to win the race against the Grim Reaper, and therefore that I will have a little bonus to enjoy when I reach 80 or 85 years of age.

Here is a chart of the Standard & Poor’s 500 stocks index over the past 15 years. Unfortunately, it does not show clearly how low the index has sunk recently. The index closed today at 851, which means that it has lost 46 percent since its recent high in October 2007.



To reach a comparable value of the S&P 500, you have to go back to June 1997. So, if you invested $1 million at that time, you now have stock holdings worth–blaring trumpets, please–exactly $1 million.

Not really, of course, because the value of the dollar has fallen during the interim by about 27 percent, if we use the CPI as our price index for the calculation.

If we adjust for the depreciation in the dollar, today’s S&P 500 stands, not at 851, but at 622 (in dollars comparable to those of June 1997). To reach that level of the index, we’d need to go back to the autumn of 1995. So, the investor has held his bundle of S&P shares for 13 years, received piddling dividends, and enjoyed a capital gain of exactly 0 percent. Pretty cool, eh?

The experts always tell us that in the long run the stock market is our best bet for building wealth. I’m beginning to have some doubts. But even if it is, that fact is cold comfort to those of us whose long run is getting short enough to count on the fingers and (for those with especially stout genes) the toes.