The SP 500 has not been easy to beat over the long run, so I was a bit surprised when I saw an article on Marketwatch titled ‘Why an S&P 500 fund is a poor long-term investment’. The author makes that case that although the S&P 500 compounded at nearly 18% through the 80s and 90s, the following 15 years 2000 – 2014 only had an annualized return of 4.1%. This is compares lower to a few vanguard equity funds which had a better return over that 15 year period, in particularly small cap value.
Fifteen years ago, at the start of 2000, the S&P 500 represented the most widely held asset class, large-cap U.S. stocks. This was no surprise, as this index had compounded at nearly 18% for the previous 20 years. And in the last half of the 1990s, it had compounded at an eye-popping 28.6%.
Any investor coming into the market 15 years ago would have been mighty tempted to jump onto this bandwagon. But many of those who did make the leap soon had good reasons to regret it.
Two major bear markets were among those reasons. But some important numbers will show others.
I recently went online and found the 15-year track records (the longest that Morningstar.com provides) for the 10 Vanguard equity funds I recommend. All but two of those funds have 15 years of history; the exceptions are Vanguard FTSE All-World ex-US Small-Cap Index Fund VFSVX, +0.11% investing in international small-cap stocks, and Vanguard Global ex-US Real Estate Index VGXRX, +0.09% investing in international REITs.
I found one bit of good news: All eight of the funds with 15-year track records had positive returns through Dec. 31, 2014.
But Vanguard’s 500 Index Fund VFINX, -0.07% at 4.1% (annualized), was the poorest 15-year performer among the five U.S. Vanguard funds. Only the Vanguard Developed Markets Index Fund (large-cap international stocks) did worse, at 2.6%.
Here are the 15-year returns for the other six funds:
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Vanguard Value IndexVIVAX, -0.12% 6%
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Vanguard Small-Cap IndexNAESX, -0.03% 3%
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Vanguard Small-Cap Value IndexVISVX, -0.15% 5%
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Vanguard REIT IndexVGSIX, +0.44% 5%
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Vanguard International ValueVTRIX, -0.09% 5%
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Vanguard Emerging Markets Stock IndexVEIEX, -0.08% 1%.
The article then goes on to preach diversification, but really doesn’t make any justification for why the S&P 500 is a poor long-term investment today. Clearly their is a lesson to be learned, as I explained in my Guide To Selecting A Mutual Fund, past performance doesn’t indicate future results, but that doesn’t necessarily make them a poor long term investment right now.
The author offers no future looking perspective or relative basis for why the S&P 500 is a poor investment. Sure the sp500 is now into a 7 year+ bull run with staggering returns for the last years, but in 1987 it was also 7 years into a bull run… that had another 13 years remaining. Time in the market is the ultimate tell tale of returns as we can’t predict the future. This chart below, from a blog post by A Wealth Of Common Sense, shows that extended periods of low growth are followed by periods of high growth. Looking at those, you could only say, the S&P 500 is a great long term investment.
Of course over these same periods, small cap value kicked ass so I’ll add this chart as well which shows asset class comparison over the same time period.
Choosing a strategy with a likely risk/reward profile that you can stomach is where you should invest.
What I’m Reading: