Tuesday, April 1, 2008

Sun Emerges from Gloom and Doom

A recent article in the Wall Street Journal made much of the fact that the S&P 500 Index is only slightly higher than 10 years ago. I didn't see the article, but I've seen comments about it in several places, and I even had a comment from a friend in Indonesia. The general tone of most articles and comments I've seen are despair that the "US Markets" have had such a meager return.

All the noise put me in the mood to develop my own perspective and to look at my own returns during this "disturbing" period in the market. After all, I depend heavily on use of index funds, of which the S&P 500 is the biggest. The results brought the sun out of gloom and doom for me and confirmed the power of the investing system I use.

First, it is interesting that this one index and single period is highlighted, with a reference to the fact that the Nasdaq did even worse. A 5 or 15 year period would have painted an entirely different picture, as would a look for the 10 year period for, say, the MidCap Index.

I use a system of dollar cost averaging, agressive rebalancing and broad diversification across several indexes (You can see the details in my article of March, 2007) in my 401-K. And, so, my results beg comparison to the performance of the S&P 500 Index. After a quick look back at my performance, I came back with a smile... and a return of about 11% per year over the past 10 years! How is this possible in such a flat market, particularly by a passive system that focuses on index funds, rather than brilliant stock picking? The results are a testament to the power of a disciplined, mechanical system that uses simple, basic, money management techniques like diversification, dollar cost averaging and rebalancing to beat the markets, while reducing risk.

Spring is here, and the sun is out. The gloom and doom is pushed back, for at least another day.