Sam Sivarajan holds a doctorate in behavioural finance and has led wealth management teams at several of Canada’s largest financial institutions. He is the author of two bestselling books and can be found at www.samsivarajan.com.
In December, 2021, we couldn’t wait to say goodbye to the old year and welcome 2022 as a new, non-COVID lockdown year. In December, 2022, we couldn’t wait to say goodbye to a year of inflation, falling stock markets and house prices and growing economic and geopolitical uncertainty. So, what will 2023 hold in store for us? Well, many are expecting continued interest-rate hikes, higher consumer prices and even a recession. What’s an investor to make of this? Despair and doom? Leave money in low-interest bank accounts or under the mattress? Or is there another way?
While we can’t say for sure what 2023, or the rest of the decade, might have in store for us, a quick history trip might help. The first decade of the 21st century (2001–10) is considered by many investors to be the “Lost Decade.” Starting the period with the Tech Wreck (Nasdaq peaked in March, 2000, and lost 78 per cent to the bottom in October, 2002) and ending the period with the Great Recession (Dow Jones peaked in October, 2007, and lost 50 per cent to the bottom in March, 2009), investors had a rocky ride, to say the least. A person who had invested $12,000 in the S&P 500 in January, 2001, would have ended the decade with about $11,048, a return of minus-7.9 per cent for 10 years of patience.
So, truly a lost decade. Or was it? The minus-7.9 per cent figure reflects the return provided by capital appreciation of the S&P 500 – in other words, there wasn’t any. However, the companies in the S&P 500 also pay their shareholders dividends. The S&P 500 Total Return (TR) Index measures return, including the dividends paid, treating them as being reinvested back. An investor who had invested $12,000 in the S&P 500 TR in January, 2001, would have ended the decade with about $13,335, a return of 11.1 per cent for 10 years. Not stellar, but also not a lost decade.
What about the investor who wanted to invest throughout this incredibly volatile time period? Well, let’s assume that someone invested $100 every month for the 10 years between January, 2001, and December, 2010. Over this decade, she would have invested $12,000 in total ($100 a month for 10 years or 120 months). Investing in the S&P 500 would leave them with $13,376 on Dec. 31, 2010, for a return of 11.5 per cent. The same $100 a month in S&P 500 TR (reinvesting dividends) would have left the investor with $14,841, or a return of 23.7 per cent.
And the investor who kept her head, invested during the Lost Decade, and then stayed invested, was able to capture the boom in the 2010s and realized a further 206-per-cent gain on her S&P 500 portfolio (or 286-per-cent gain on her S&P500 TR portfolio), as of the end of 2022, without investing a single dollar more.
What are the key lessons from the Lost Decade for investors in 2023? Yes, we don’t know how long and deep the recession will be or what interest rates or stock markets will do. But, first, this doesn’t matter much if you are investing for the long term. Second, investing in a broadly diversified portfolio of dividend-paying stocks (or ETFs) and reinvesting those dividends can really pay off. Third, making regular contributions to this portfolio allows the investor to get the benefits of rising markets without having to time purchases (if the investment goes down temporarily, the same contribution amount will purchase more units or shares, poised to benefit when the market rises again).
These three lessons and two key nuggets of wisdom from Warren Buffett will help investors thrive in the year(s) to come: “We all hope for capital gains, but the only thing we can really count on is the dividend” and “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
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