The 5 Year Bull Market Myth!

Every time you read the financial section of the paper these days it seems that someone is calling attention to the recent 5 year run the market has experience. But you have to ask yourself can you really tell anything at all from such a short term gain. After all how does this really effect the average investor?

I liken it to the horse wearing blinders effect. Not that I get out to the horse races much but if you have ever been to one you will notice that they put these things called blinders on the horse's eyes so they will not get distracted during the race. Sometime our gut reactions as humans make us act just like those horses wearing blinders and we tend to see only what has happened lately. This is exactly the case of the mythical 5 year bull market and this phenomenon can be very dangerous to the novice as well as the experienced investor. Let me explain.

First let's look at this so called bull market and why it has been deemed as such. Going back about 5 years ago to September 30, 2002 the S&P 500 closed at 827.37. Flashing forward just a little over 5 years to October 8, 2007 the S&P closed at 1,554.41. If you do the math that equals an attractive annual growth rate of 14.19% per year. Wow you might say, what's wrong with 14%, sign me up! The problem is this is not the whole story. In fact this is a dangerous story if market makers and mutual fund promoters use this information to influence countless investors to invest in the market without considering the true risks and the effects these risks will most likely have on their returns. Let's take our blinders off for a moment and consider the long term implications of this mythical market.

What if we were to go back just 24 months to the year 2000. In fact let's go back to January 3, 2000 when the S&P 500 index closed at 1,441.47. Let's assume that this just so happened to be the date that you decided to invest your hard earned money into the market. Would you still be up 14.19% per year on average? Hardly. In fact you would have spent two years with a stomach ache watching your money decline as the market dropped to the bottom on September 30, 2002. In fact you would have lost 42.6% of your investment. Could you afford to lose that much money in so short a time?

But some may argue that this was only a paper loss and if they would just hang in there until the market rebounded they would be fine. The truth is the market did rebound but with what effect?

If you would have invested your money directly in the S&P 500 on January 3, 2000 to October 8, 2007 for a little over 7 years your compounded annual growth rate would have been .96% during the entire period. Not even one percentage point.

Now that is a market that suddenly does not look so bullish does it? And all we did was look back an additional two years. What if we looked ahead?

What would the S&P 500 Index have to do over the next two to three years so that by 2010 this investor would actually be able to justify all of the risk that he/she just took over this 10 year period?

By: Antonio Filippone