Breakeven! | Fee-Only Financial Planners Long Island


I recently spotted an article in Barron’s magazine about the Standard & Poor’s 500 index retracing its losses from March 2000, when the index hit a record high, to May 2007, the so-called breakeven date, when it closed at a new record high. This period included the three-year bear market that began in March of 2000.

Merriam-Webster dictionary defines “breakeven” as the point at which cost and income are equal and there is neither profit nor loss; also: a financial result reflecting neither profit nor loss.

A person who invested $100,000 in the S&P 500 Index in March 2000 would now have $126,000 in their account, more than seven years later. That’s better than breakeven because I factored in reinvested dividends, which the Barron’s article did not do.

For comparison purposes, using the time value of money, consider that an investment earning a modest 5% total return annually over seven years would have made the account worth about $141,000 today.

So should investors be satisfied with this standard benchmark’s performance? They might, if they thought they recovered their original investment. But while there is virtue in preserving capital, most of us don’t invest with the goal of staying even.

For that reason I think it would be useful to demonstrate that, in terms of purchasing power, the return of the S&P 500 was in fact much less than satisfactory.

Even though the original investment of $100,000 – without dividends – had a zero-percent return over this period, the accrued dividends had a compound return of about 3.3% when reinvested, highlighting the important difference dividends can make over time when reinvested back into the portfolio.

But a couple of other factors come into play that can impact the value of your portfolio, including inflation. Tame or not, it’s always with us and it’s constantly eroding money’s purchasing power. Inflation averaged 2.75% annually over the past seven years, as measured by the Consumer Price Index (CPI), which means that what took $100,000 to buy back in 2000 would require about $121,000 now.

Well, you may say, even with inflation, you’re still roughly at breakeven.

But wait, as they say in late-night infomercials, there’s more! Another factor to consider is the value of the dollar, which has gained importance with the development of the global economy and the increasing globalization of securities markets. Over that seven-year period the U.S. dollar’s value slid about 28% against the euro and 22% against the DXY (the U.S. Dollar Index), which is the greenback relative to the value of a basket of major trade-weighted currencies. This translates into a decline of about 3% annually in global purchasing power.

As applied to the original $100,000 – factoring in total return, dividends and inflation – the overall impact is a decline in international purchasing power leaving the growth over 7 years to amount to about $102,000.

In effect, inflation and weakness in the dollar more than offset the dividend gain. So are we really at breakeven? Not remotely. We lost $19,000 ($121,000 in today’s buying power – $102,000 value of the $126,000 portfolio less currency loss).

Want to feel even worse? The bond market had great returns during this period of time. The $100,000 investment could have earned an annualized return of 6.25% in bonds, as measured by the Lehman Brothers Aggregate Bond Index. The $100,000 would now be worth more than $155,000.

While we are not advocating investing in only one asset class, had the $100,000 investment been divided among stocks, bonds and cash in a balanced portfolio using, respectively, the Vanguard 500 Index (60%), Vanguard Lehman Brothers Aggregate (35%) and Vanguard MMF (5%) during this period, the portfolio would have returned 4.31% annually and would now be worth about $135,000. In addition, it achieved this result with much lower risk than an all stock portfolio. This shows that asset allocation, diversification and the reinvestment of dividends and interest pays off, even after a three-year bear market.

So the moral of this story is, do not invest all of your money in one asset class or one basket of stocks – even if it’s the S&P 500. Be smart and allocate your portfolio among stocks, bonds and cash equivalents. Make sure your dividends are reinvested or reallocated in your portfolio and be sure to have exposure to foreign stocks and bonds to protect your global purchasing power.

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