The Next Fifty Years

Fifty years ago today, the S&P 500 closed above 100 for the first time ever. The New York Times ran the following headline on the cover of the business section.

The funny thing about going through old news papers is how some things never change. This sentence could be in tomorrow’s paper: “Yesterday’s upswing, they said, seemed to represent an attempt by the large and small investors to acquire positions in the market ‘before it ran away from them.'”

The last sentence of the story is something we see all the time: “International Business Machines, which climbed 18 points on Monday eased 51/4 to 3693/4 on profit taking.”

1968 was one of the most eventful years in our nation’s history. Between the Civil Rights Movement, Vietnam, and the assassinations of MLK and RFK, nobody could have guessed how kind the next fifty years would be to investors. From June 1968 to today, the S&P 500, with dividends, gained over 11,000%, or 10% a year.

Nobody also could have known how brutal the next years 14 would be. On August 12, 1982, the S&P 500 closed at 102.42. That’s 5,182 days without any increase in the price index. Assuming you held onto an index mutual fund that didn’t exist, and reinvested your dividends despite suffering a 36%, 48%, and 27% drawdown, with spiking inflation, you would have received a 96% total return.

It’s impossible to predict the returns side of the ledger, but you can guarantee that risk will always be there. Since 1968, the S&P 500 (daily closing prices) has experienced 14 separate 10% declines, with 6 turning into a bear market, as shown in the table below. I know predictions are silly, but XIV to my head, here’s what I got for the next 50 years.

  • 50% chance of annual index returns greater than 5%.
  • 75% chance of a 50% decline
  • 95% chance of a 30% decline
  • 100% chance that every 10% decline feels like it’s going to be a 40% decline.