Saturday, January 03, 2009

Investing for the Future

What would have happened if you had invested $1000 on the last market day of the year in the following investments, starting on Dec 31 2000?


Investment value on Dec 31, 2008:
  • Gold - $16,043.10
  • Silver - $11,446.20
  • S&P 500 - $4,370.23
  • 5-year CD - $10,573.45
  • Cash - $9,000.00
Surprising observations:
  • the S&P 500 investment lost over 56% of the principal invested
  • gold did not lose value in any year (on a year-over-year basis)
I only analyzed back to 2000 because that is when I began saving for retirement through a 401k.

This simple analysis leaves me wondering:
  • Why do 401ks (at least the ones I have seen) not provide precious metals or CDs as investment options? Why must our retirement plans always have something at risk?
  • If gold is merely a store of wealth and not a 'productive' investment, then how on earth can it be providing the best returns over a non-trivial timeframe like 8 years? How big is the credit bubble? Is the US dollar a bubble and is it popping?
Many stock market pundits are proclaiming that now is a great stock-buying opportunity. Haven't they been saying that for 8 years? Isn't the S&P 500 still overpriced historically in terms of earnings and relative to GDP? Keep in mind that financial companies accounted for something like 40% of the S&P 500's earnings in recent years and a large portion of US GDP only exists in a credit bubble. That trend will not hold in 2009. This means stock market prices must decline to keep pace with declining earnings and GDP.

The S&P 500 closed out 2008 at 903; according to my hand-waving (aka analysis) the S&P 500 needs to go below 650 to reach valuations similar to the '74, '78, and '80 recessions. Yet having the S&P touch 650, 600, or even 550 does not mean that it is a good time to buy stocks. Consider the stagflationary period from Aug 11, 1972 to Aug 6 1982; the S&P 500 went from 119 to 103. I haven't done the math on what you'd have left after adjusting for inflationary losses after the 15% nominal loss, but it's not pretty.

It seems like saving money for the future should be a simple matter as long as one has the means and the willpower, and yet it isn't. Why is that?

Pricing data was obtained from:
My Investment Analysis is available as a Google Spreadsheet. I am most interested in any and all errors you find.

Disclosures:
  • Long gold and silver
  • Almost long energy commodities - will buy when deflation halts
  • Short US stocks
  • Short US real estate - residential losses halfway (changed from 'mostly') done, commercial just getting warmed up
  • Short US dollar except vs Euro

2 comments:

Knight of Nothing said...

This is an excellent and troubling post. I've sent it to a few friends with whom I discuss the market.

Not sure if you ever saw it, but on a related note, have a look at this.

Happy New Year Stephen!

Brent Ryan said...

That's very interesting...