From the end 1989 to May 23rd of 2019 (nearly 30 years), the S&P 500 has returned 695%…. not including dividends[1]. If a couple retired in 1989 with $500,000 invested in an S&P 500 index fund and lived on just dividends and social security, that investment would have grown to approximately $3,457,000 (less expenses) to leave their children, grandchildren or favorite charity. Please take note that this timeframe even includes the “lost decade” from 2000 to 2010 where the stock market did next to nothing because of the dot com bust and the global financial crisis. Anyways….
What did the dividends look like? Great question!
The S&P 500 dividend was a little over $22[2] in 1989. The yield was 6.3% which amounts to over $31,000 per year in income for a half million dollar portfolio. Since the dollar was worth approximately twice as much back then as it is today, this equates to nearly $62,000 per year by today’s standards[4]. By March of this year, dividends had more than doubled to $55.23[2]. The yield was 1.95% which would amount to over $67,000 per year for a $3,457,000 portfolio.
Assuming both individuals took home the average social security paycheck of about $15,500 per year[5], they would be living on $98,000 per year today total between social security paychecks and dividends from their index fund (again, not having to sell any shares).
In recap, dividends from the S&P 500 outpaced the rate of inflation and, at the same time, resulted in a massive increase in net worth for these hypothetical long-term investors.
I know. I haven’t even mentioned the trade war yet. Don’t worry, I’m getting there! But does anybody even care about it anymore after looking at these numbers?
This wonderful story would only be true, of course, provided that this couple didn’t panic over any of the seven corrections (10%-19.9% drop) or three bear markets (more than a 20% drop)[3] that they saw in retirement. How does the trade war compare to everything that happened over those 30 years? I can assure you that it doesn’t exactly top of the list. Indeed, barely a blip on the radar.
Everybody’s situation is unique and most likely should have a more diversified portfolio than just an S&P 500 index fund. Certainly, if you are a client already, we have more than just the 500 largest companies in the US in your portfolio, and for very good reasons. I believe this example does a good job at illustrating the power and resiliency of these companies and our economy and a way to put today’s headlines into a historical perspective, let alone any other headline you see that attempts to induce panic. Moreover, how important it is to be patient with your investments and to look past the day-to-day gyrations that are all but meaningless to the long-term investor.
Creating an investment strategy based on your goals, risk tolerance and investment timeframe is only the beginning. Sticking with it is the only chance it has of working. This can only be done by being proactive with the investment strategy instead of reactive to current events and market movements. Please feel free to contact me with any questions or concerns raised by this discussion.
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