Today, I am stuck frozen in place (literally) in my home. We got an uncharacteristic 8 inches of snow in Little Rock, Arkansas. My files are just a mile away in my office, but the roads are so slick and it’s so cold that there is no hope of getting there. Out of boredom and the general need to feel I accomplished something, I decided to stress test an idea. I am no financial advisor. I’m a lawyer. I don’t give financial advice. I do have, however, an inquisitive mind that does not automatically accept and repeat information disseminated for mass consumption. I like to think about critically about the information fed to me rather than swallow it whole.
The financial press has, since I was a stripling, trumpeted the success of the stock market. One of the claims made is that regularly placing money in a mutual fund that tracks the S&P 500 will generate sufficient returns for a comfortable retirement. My mother used to tell me this. My brother-in-law stock broker used to tell me this. I tried. I made no money. The returns were pathetic. Talking to my friends revealed that some were big fans of the stock market, others were tepid at best.
My personal experience and the varying successes of my friends led me to believe that must be some rational explanation for why the trite and maybe true “invest in index” works for some, but not others.
To test the idea, I downloaded a table that had the yearly return of the S&P 500 from 1992 to 2020. In addition, I downloaded a table with the rate of inflation for the same time period. I deducted the rate of inflation from the rate of return to arrive at an inflation-adjusted return. It is far better information when inflation is figured into the rate. It will show how much of the return was real growth–that is, not due to the general expansion of the size of the economy.
I took the inflation-adjusted return and applied it to a single, equivalent, annual investment over each year since 1992. My goal was to answer the question: If I invested X dollars in the S&P 500 every year since Y year, how much would I have in 2020? For example, if I put $10,000 a year in the S&P 500 since 1992, how much would I now have? The goal is to see if the year that one commences investing has any significant impact on total return.
My hypothesis is that the variation in adjusted inflation rates of return from year to year is large enough that if you began your investment on a bad year or a run of bad years, the losses to the investment principle would be great enough that you’d see significantly lower overall returns than someone who started on a good year and had a nice run of good years at the outset of their investment.
Here is what I found:
| Start Year | Ending Total Return | Avg. Ann. Return |
| 1992 | 467.84% | 13.14% |
| 1993 | 454.83% | 13.14% |
| 1994 | 476.46% | 14.48% |
| 1995 | 363.41% | 10.54% |
| 1996 | 308.86% | 8.70% |
| 1997 | 240.90% | 6.13% |
| 1998 | 194.80% | 4.31% |
| 1999 | 166.17% | 3.15% |
| 2000 | 188.27% | 4.41% |
| 2001 | 222.12% | 6.43% |
| 2002 | 303.32% | 11.30% |
| 2003 | 245.44% | 8.56% |
| 2004 | 228.55% | 8.03% |
| 2005 | 226.74% | 8.45% |
| 2006 | 205.71% | 7.55% |
| 2007 | 204.22% | 8.02% |
| 2008 | 340.88% | 20.07% |
| 2009 | 281.37% | 16.49% |
| 2010 | 255.61% | 15.56% |
| 2011 | 264.60% | 18.29% |
| 2012 | 240.09% | 17.51% |
| 2013 | 188.31% | 12.62% |
| 2014 | 171.36% | 11.89% |
| 2015 | 175.45% | 15.09% |
| 2016 | 160.31% | 15.08% |
| 2017 | 135.72% | 11.91% |
| 2018 | 148.07% | 24.03% |
| 2019 | 117.07% | 17.07% |
This was eye-opening to say the least!!! I hit the workforce in 1998. My investing started then. I always wondered why my S&P 500 index fund never did much of anything for me. The reason, as it turns out, was pretty simple. In 1998 and 1999, there was 23.67% and 17.23% growth, respectively. The years 2000, 2001, and 2002, saw negative rates of -11.64%, -15.34% and -26.77%. If we look at a plugged-in investment value of $10,000 per year, the tally for the first five years looks like this:
| Year | ||||||
| Rate | 1998 | 1999 | 2000 | 2001 | 2002 | |
| $10,000.00 | ||||||
| 1.2367 | $12,367.00 | $10,000.00 | ||||
| 1.1723 | $14,497.83 | $11,723.00 | $10,000.00 | |||
| 0.8826 | $12,795.79 | $8,826.00 | $8,826.00 | $10,000.00 | ||
| 0.8476 | $10,845.71 | $7,480.92 | $7,480.92 | $8,476.00 | $10,000.00 | Total: |
| 0.7323 | $7,942.31 | $5,478.28 | $5,478.28 | $6,206.97 | $7,323.00 | $32,428.84 |
By following the “set it and forget it” advice of automatic, period investing in an index fund starting in 1998, the principle value of the investment was greatly diminished in the first five years. A person who started investing $10,000 of his salary in 1998 until 2020 would have an inflation-adjusted $466,417.50 today. That is a paltry 4.3% rate of return over 22 years! If you started in 1998, there was run of bad luck in the first five years: The dot com bubble burst, the Y2K scare happened, the 9/11 attacks occurred, and then the 2nd Gulf War started.
I had a friend bragging about how great he did in the stock market after he retired from the military. He was collecting his military pension, then went to work for the VA as a civilian. He invested in the federal thrift savings plan to the maximum. The figure he threw out was kind of shocking considering how little time it seemed compared to my beginnings in investments 22 years ago in 1998. He started his VA job in 2008. Based on $10,000 a year, the figure he cited was probably correct. A person who started investing in 2008 with $10,000 a year in an index type fund like the federal TSP would expect to return about 340% over the time period for annual rate of 20% (inflation-adjusted) over 12 years. In absolute dollars, my friend said he had $230,000. That is about what one would predict ($247,884 is the predicted for $10,000 a year in the S&P since 2008).
The difference between my friend and I was timing–dumb luck! Had I started working and investing in 2002 rather than 1998, I would have had an annual rate of 11.3%. That is still not his blistering 20% rate of return, but I’d be in a much better position than I am.
My conclusion is that consistent and steady investing in an index fund over many years is not an automatic path to financial independence. Much of it is just plain luck. How things go for the first few years or so makes all the difference in the final outcome.
Just for yucks, how would I have done had I bought gold all these years like some sort of doomsday prepper?
| Year | Price/ounce | Yearly Stake | Ounces Purchased |
| 1998 | 294.24 | 10000 | 34.0 |
| 1999 | 278.98 | 10000 | 35.8 |
| 2000 | 279.11 | 10000 | 35.8 |
| 2001 | 271.04 | 10000 | 36.9 |
| 2002 | 309.73 | 10000 | 32.3 |
| 2003 | 363.38 | 10000 | 27.5 |
| 2004 | 409.72 | 10000 | 24.4 |
| 2005 | 444.74 | 10000 | 22.5 |
| 2006 | 603.46 | 10000 | 16.6 |
| 2007 | 695.39 | 10000 | 14.4 |
| 2008 | 871.96 | 10000 | 11.5 |
| 2009 | 972.35 | 10000 | 10.3 |
| 2010 | 1224.53 | 10000 | 8.2 |
| 2011 | 1571.52 | 10000 | 6.4 |
| 2012 | 1668.98 | 10000 | 6.0 |
| 2013 | 1411.23 | 10000 | 7.1 |
| 2014 | 1266.4 | 10000 | 7.9 |
| 2015 | 1160.6 | 10000 | 8.6 |
| 2016 | 1250.74 | 10000 | 8.0 |
| 2017 | 1346 | 10000 | 7.4 |
| 2018 | 1387.64 | 10000 | 7.2 |
| 2019 | 1371 | 10000 | 7.3 |
| 2020 | 1644.24 | 10000 | 6.1 |
| Total Ounces | 382.1 | ||
| Total Value | $628,235.52 |
For accuracy’s sake, I must show the non-inflation rate of return for my stock market stake. Removing inflation and investing $10,000 a year since 1998 in the S&P would be a total return of $602,864.92. Gold did better! I note, however, that gold suffers a 28% capital gains tax rate, so I don’t think that would be a viable option for investing. One must liquidate the gold into cash to eat it! One could sell a lot purchased some time ago to dodge capital gains, but eventually, the government will get their money. In this case, $175,905.94 in capital gains would due on the gold. Only $90,429.69 (15%) would be due on the stocks. Of course, if you invested in the stocks within a 401k, you’d pay ordinary income on it which may be less than 15%, depending on the person.
Hoping that the roads are clear enough to get back to my files tomorrow!
My Best,
Mark Robinette