Saturday, April 22, 2006

Secular Bear Market?

Are we in a secular bear market? The answer is yes, theoretically speaking. The indexes have not got back to the peaks or gone beyond the peaks achieved in the year 2000.

Is this a wise way to look at your investments returns? Is your portfolio in secular bear market since 2000? Maybe, the answer is no.

How?

I want you to look at the returns of the broad market index from 1990 to 2006. If you had invested $1,000 in the stock market every year from 1990 to 2006, what would your portfolio look like today? I used the MSN Moneycentral’s chart tool to calculate the returns of the Vanguard 500 Index Fund (VFINX) from 1990 to 2006. The Vanguard 500 Index Fund tracks the performance of the S&P 500 index.

  • $1,000 invested on 1/1/1990 is valued at $4798 today
  • $1,000 invested on 1/1/1991 is valued at $5088 today
  • $1,000 invested on 1/1/1992 is valued at $3781 today
  • $1,000 invested on 1/1/1993 is valued at $3584 today
  • $1,000 invested on 1/1/1994 is valued at $3252 today
  • $1,000 invested on 1/1/1995 is valued at $3226 today
  • $1,000 invested on 1/1/1996 is valued at $2322 today
  • $1,000 invested on 1/1/1997 is valued at $1865 today
  • $1,000 invested on 1/1/1998 is valued at $1414 today
  • $1,000 invested on 1/1/1999 is valued at $1104 today
  • $1,000 invested on 1/1/2000 is valued at $912 today
  • $1,000 invested on 1/1/2001 is valued at $1019 today
  • $1,000 invested on 1/1/2002 is valued at $1116 today
  • $1,000 invested on 1/1/2003 is valued at $1417 today
  • $1,000 invested on 1/1/2004 is valued at $1161 today
  • $1,000 invested on 1/1/2005 is valued at $1064 today
  • $1,000 invested on 1/1/2006 is valued at $1034 today

As you can see from the returns above, almost all of the money invested is not in a bear market. Only the $1,000 invested in the year 2000 is losing money today. We can say that the money invested in year 2000 is in a secular bear market. Every other dollar invested before and after year 2000 has made money in the hypothetical portfolio.

So, whenever you read or hear about “secular bear market”, take it with a grain of salt. It may not mean much to you.

All disclaimers apply.

4 comments:

LAMoneyGuy said...

Secular bear markets also refer to periods when the market is underwater, relatively speaking, for an extended period as the prior secular bull markets overvaluation unwinds. From January 1966, the DJIA reached just shy of 1,000. January 1973 it closed above 1,000 for the first time. December 1974 the Dow reached a low of 577. At the point in January 1973 when you were up on an absolute basis vs. 01/66, were you in a secular bear market? I believe the answer is yes.

Do you believe we have reached a permanent plateau, and the market will not drop below 10,000? I don't.

Anonymous said...

From 1966 (peak) to 1973 (trough). When you calculate from peak to trough, or trough to peak everything looks exaggerated. The idea here is ignore the peaks and troughs and your returns will not look too much bad and too much good.

Statistically speaking, if we remove the outliers we get the smooth ride.

1966 was an outlier. 1973 was an outlier.

Look in the middle and things will not look as bad.

2000 was an outlier and 2002 was an outlier also.

LAMoneyGuy said...

No, it's not statistical trickery. Find me a period from 1982-1999 where you would be down 40% over 7 years (like '66-'73). Even using peaks and troughs it doesn't exist. 80s-90s was a secular bull.

Jeff said...

Quick question - On the MSN site, how did you calculate how much $1000 would be worth today? I can see the historical prices, but not the function that can do that for me easily. Thanks!