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Are You Still Bullish on Investing in the Long Term?

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Today I ask you to go on a quick journey with me, my friend Sherman, and his dog Mr. Peabody. Mr. Peabody is no ordinary dog. He's built a little device that he calls the WABAC machine. It allows us to go back in time. Today, he's set the date for January 8, 1999.

Usually he's known for taking us to famous dates in American history like November 19, 1863 or July 4, 1776. This makes Mr. Peabody's choice of January 8th, 1999 quite curious. You arrive in Boston, Massachusetts and take a walk around. You notice the mood is a little mixed. The locals are still disappointed from yet another Patriots playoff loss 5 days ago. Since the Celtics last won an NBA title in 1986 every season has ended in disappointment. You wish you could tell them to keep their chin up, better times in the world of sports are ahead.

You reflect for a minute where you are. The news is filled with gloom and doom about Y2K. It is business as usual at the World Trade Center. You notice two men talking and one says to the other that he's going to get cell phone this weekend. He seems distracted as he is reading a Wall Street Journal about the latest round of Internet IPOs.

It is that last point that Mr. Peabody picks up on. He's brought us to January 8, 1999 for a simple reason, the S&P 500 closed at 1,275.09. I ask Mr. Peabody, "Okay, but what's significant about that?" He responds, "You may not realize this, but last Friday the S&P 500 closed at 1,271.50." Sherman pipes up, "You mean that in more than 12 years the S&P 500 hasn't moved significantly?" Mr. Peabody responds, "That's correct. If you invested a thousand dollars in NYSE:SPY on January 8, 1999, you'd have approximately the same money as you did last Friday. The world has changed dramatically, but your investment would be more or less the same." I thought to myself, "I've been doing better in Lending Club."

On Monday I asked where I should do a 15-year Mortgage or the 30-year Mortgage. A decade ago, I would have gone with the 30-year mortgage and invested the difference in the payments in an effort to maximize my money. Today, I have less confidence in investing in equities. I went with the 15-year mortgage - it seemed to be the best move on so many levels.

Is anyone else feeling the same way? Are you bullish on investing over the long haul?

Posted on June 22, 2011.

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15 Responses to “Are You Still Bullish on Investing in the Long Term?”

  1. I still think equities will outperform most investments (I wouldn’t go so far as to say “all” investments) over the long haul. However, I do have some money (happily) invested in Lending Club. I think the bubbles that we’ve seen over the last decade or so (dot-com, real estate, and more recently – gold) have had a marked effect on all forms of investment.

    Lastly, I would like to thank you for conjuring up memories of Mr. Peabody, the smartest dog ever. I would hope, however, that you could work in Natasha and Boris in a future post ;-)

  2. Dan says:

    I like the descriptive story and the point that you made. I’ve vascillated back and forth regarding whether to try to pay the house off sooner or investing any extra money for retirement. I’m still sticking with the 30 fixed rate mortgage. Rates are so low and we still get the tax break on mortgage interest now. Something tells me that we’re in for inflation in the days ahead and a 30 year fixed mortgage in the 4%’s is going to be a great thing to have when interest rates do eventually rise. I’ve read that 30 year fixed mortgages may become a thing of the past in this country and they are somewhat unique to the United States as it is.

  3. Bill says:

    You forgot dividends. From 12/31/98 to 5/31/11 (which is all my bloomberg wants to let me do) the S&P returned 2.17% annually for a total return of 29.62%. $1000 bucks is now $1300. Not very exciting but better than nothing, your point still hold true though.

    Dan, 30 year mortgages are a strange thing but I’m not sure that they are on their way out. It’s been ingrained in American culture for so long that that is how you buy a house I doubt it will change within an economic cycle.

  4. Cat says:

    I am the one who has little faith in the coming years. I took out a 30 yr. mortgage 7 years ago and today it is paid off. I am nearing retirement so my investments are prop. tax savings, insurances, health and shopping all basic living goods (not hoarding) but buying against the near hyperinflation that I fully expect. If we don’t go bust I won’t have lost anything but will be far ahead and can sleep at night.

  5. Jackie says:

    Oh I loved Mr. Peabody! And I guess I’m splitting the difference, paying off our mortgage ASAP (hopefully early next year) and continuing to invest — in both stocks & other things. Also, of course it depends on which stocks you invest in. Unless you’ve just got an index fund that mirrors the S&P 500 and you pick nothing else, it matters more how your individual investments are doing.

    By the way, I can no longer comment on your site in the mobile version, which is how I normally read it. It doesn’t seem to have that option, unless I’m missing it.

  6. Lazy Man says:

    Thanks for reminding me about the dividends Bill. I was going to just use the indexes, but then I remembered that I could make it more tangible if I used an ETF.

  7. Kirk Kinder says:

    If you look at market history, we have secular bear and bull markets. This trend goes back to the 1800s (probably further but documentation does not exist). For example, in 1966 the Dow was at 974. In 1982, the Dow had climbed to 975 – one measely point. Certainly, lots of volatility existed over this period, but the end points were flat. Then from 82-2000, the Dow climbed from 975 to over 14,000.

    We can expect another few years, anywhere from 2 to 10, of flat markets. Certainly, we get dividend growth as Bill points out, but we will certainly get tons of volatility. That 1.8% yield on the S&P 500 may not be comforting if we have wild swings in the markets.

  8. Hi. To be brutally honest on my way to financial independence I do not believe that there is another way.

    I would definitely not invest in properties, as population in west (the USA, Europe) is rapidly shrinking, or stable at best.

    I would just follow the trend by investing in emerging markets and elsewhere where the growth is, Instead of bonds for which I would go for gold.

    One thing I do for sure in my calculations – not counting on historical average growth. I just can not afford to wait so long.

    The way to financial independence is it not a straight forward.

  9. Yep, the last 10 years really puts the spotlight on the idea of asset class diversification, instead of just investing in the domestic stock market.

    People were telling me that I was foolish when I was paying extra on my house so that I could pay off my 30 year mortgage off in 11 years, but I’m glad I did. ;)

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  12. It’s apparently fairly common for a major asset class to spend 10+ years not doing much of anything, while still having good long-term returns. At the same time you may find 3 other asset classes doing well (or in this case just bonds). Looking to foreign investments more might help ensure that you always have something working for you.

    If you do decide to stop investing in US large-cap stocks for now, there’s a good chance that they’ll have their time again later on. When would you get back in? When the S&P is at 3000?

  13. Lazy Man says:

    Value Indexer,

    You make some good points. I would like to see what the returns for bonds were over the last ten years. I’m having a little difficulty finding an index that reflects their performance. I still think that after taxes and such, the returns of “doing well” will be closer to 4 or 5%. That’s not bad, but minus inflation it really isn’t doing too much. I’m doing as well or better in Lending Club.

    I’m not getting out of investing in the U.S. stock market (neither large nor small caps), I’m just not expecting much growth for that money over the next few years. I’ll be keeping some in cash looking to invest in businesses with more growth. When the Dow drops back from its highs, I tend to slip a little more cash in.

    S&P 3000 is pretty hard to fathom for me. It sounds like the Dow 36,000 prediction of 1999. The theory was that it was going to happen in a few years. It’s 12 years later and the Dow isn’t close. It hasn’t budged much. I believe some day it will get there… if for no other reason than inflation. It’s just a question of when. If it takes 100 or 200 years, it’s not that helpful is it?

  14. There are some good alternative investments. I just opened an account with a reputable mortgage lender that has a 20+ year history of high yields. But I’m not putting too much faith in it yet. Apart from the risks (it’s geographically concentrated in a very hot market, it’s a small player with only $230m of assets, and mortgage interest rates are fairly competitive now), it’s structured so I have one opportunity to withdraw every 5 years unless I accept a lower yield.

    I expect it to work well as a small part of my portfolio, and this will help me keep an eye on it to see if it gets more attractive. I haven’t looked at online private lending, but it may well have similar factors that prevent it from being a major foundation of a portfolio (I’m personally not interested in the research/analysis part). I’m still using a core of stocks (canadian, us, and eafe) plus a small bond allocation because I think these asset classes have good reasons to generate long-term returns. I expect increasing profits from my business too but I don’t want to have all my income and investments in one place so I still need a separate investment portfolio.

    I also don’t know if I’ll get a lot of growth out of stocks in the next few years (maybe they’ll go to new bull/bubble heights and I’ll be able to rebalance some of that into bonds). But every overnight success takes years of preparation (and that’s when you have a lot of control over it – stock returns seem to happen more slowly than many other things). The good returns can be made in a very short time if you’re there when they happen, and I see a lot of reasons to expect that they will happen sooner or later. We don’t know if it will be in the next 3 years or the next 20 years but that partly depends on how expectations match up to reality. It’s hard to get a reading on current expectations and nearly impossible to even guess which direction we’ll be going in the future. For someone who had never seen the dow jones index go over 300 it would seem strange to talk about it being at 12000 but a lot of things we aren’t expecting will eventually happen.

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