Floyd Norris: The Crash of 1987 - 22 Years, Two Lessons
http://norris.blogs.nytimes.com/2009/10/19/22-years-two-lessons/22 Years, Two LessonsToday is the 22nd anniversary of the 1987 stock market crash — a plunge that first terrified investors and then, after stocks recovered, persuaded them that stocks were always great investments. That got me to wondering how a buy-and-hold investor would have done over those 22 years. I assume that lucky investor bought the Standard & Poor’s 500 at the close on Oct. 19, 1987, and held on thereafter, reinvesting dividends and changing the portfolio only to reflect index changes. I also assume no taxes and no transaction costs, assumptions that may strike some people as a tad optimistic. The results are not bad. For the entire period, that investor would have earned an annual return of 9.9 percent per year before considering inflation. After inflation, the return is a still good annual rate of 6.8 percent. But, as you well know, the stock market returns were not evenly spread over that period. During the first 11 years, the average return was 18.6 percent per year before inflation, and 14.6 percent after. During the next 11 years, the returns averaged 2 percent per year, not enough to offset inflation. The investor lost 0.5 percent per year when inflation is taken into account. There is no doubt that investors overlearned the lesson of those first 11 years, that stocks were a good long-term investment. Have the bad returns over the last decade caused them to overlearn the opposite lesson? If so, all those who are forecasting the imminent collapse of the stock market could turn out to be as wrong as their predecessors were on that scary Monday, 22 years ago. |
