Investing Through a Depression.

Brexit.  Negative interest rates.  Falling stock prices.  Terrorists attacks.  Morgan Stanley recently published a report stating the world economy looks like the 1930s.[1]   The decade of the thirties was known for the Great Depression and lasted from 1929 to 1939.   The thought of another depression is, well, depressing.   We did come close with the Great Recession in 2008.   

What was it like to be an investor during the Great Depression? 

From 1930 to 1940 large-cap stocks lost 1 percent. A $100,000 investment in 1930 fell to $89,655 by the end of 1940.  By 1950 your original investment climbed to $314,743.[2]  A portfolio of long-term government bonds grew to $170,839 from 1930 to 1940.   Your bond portfolio was worth $221,602 at the end of 1950.[3]

Here is a look at large-cap stock returns by decade:[4]

1930 to 1940 the average annual return was a negative 1 percent. 

1930 to 1950 the average annual return was 5.6 percent.

1930 to 1960 the average annual return was 8.9 percent.

1930 to 1970 the average annual return was 8.7 percent

1930 to 1980 the average annual return was 8.7 percent.

1930 to 1990 the average annual return was 9.5 percent.

1930 to 2000 the average annual return was 10.6 percent.

1930 to 2010 the average annual return was 9.4 percent.

 A $10,000 investment in long term government bonds from 1930 to 2015 grew to $1,026,675.  A million dollars from government guaranteed bonds sounds pretty good.[5]     

What if you invested the $10,000 into the S&P 500 instead?  From 1930 to 2015 your $10,000 investment would have grown to $24 million![6] 

It gets better. A $10,000 investment in the Dimensional US Small Cap Value Index in 1930 would have grown to $637 million by the end of 2015![7]

During times of uncertainty investors will sell stocks and buy bonds.  The safety of bonds can’t be denied.  In the short term bonds will provide a level of safety not found in stocks.  However, as the numbers prove, if you want to create generational wealth you need to own stocks through the best of times and the worst of times. 

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way--in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.  A Tale of Two Cities – Charles Dickens.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  www.parrottwealth.com

June 17, 2016

[1] The Sydney Morning Herald, Business Day.  Edna Curran, June 17, 2016. http://www.smh.com.au/business/the-economy/world-economy-looks-a-bit-lik...

[2] Ibbotson SBBI 2015 Classic Yearbook, Market Results for Stocks, Bonds, Bills and Inflation, 1926-2014, Appendix C, page 256.

[3] Ibbotson SBBI 2015 Classic Yearbook, Market Results for Stocks, Bonds, Bills and Inflation, 1926-2014, Appendix C, page 274.

[4] Ibbotson SBBI 2015 Classic Yearbook, Market Results for Stocks, Bonds, Bills and Inflation, 1926-2014, Appendix C, page 256.

[5] Dimensional Matrix Book 2016 page 44.

[6] Dimensional Matrix Book 2016 page 14.

[7] Dimensional Matrix Book 2016 page 28.