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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 81373  
Subject: Re: Wisdom of S&P index funds? Date: 6/20/2008 7:29 PM
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Unless I'm doing something completely wrong, it looks like the value would be DOWN $800, or -5.8% !

Ignoring dividends, May 2000 to May 2008, S&P500 (SPX) had a CAGR of -.6%. With a stdev of 13.5%. Not only a loss, but a loss along with high risk. Bummer.
However, with dividends the CAGR was 1.23%. Still not good, but at least not a loss.

It makes me question not only index investing (which I really *want* to work for me), but investing in general. I'd have to time my retirement to be during a peak or basically I'd be screwed.

What am I missing here?

1) Diversification.
2) And/or a more active strategy.
3) What you are also missing is a view of the long(er) term.
For the period Jan 1983 to May 2008, SPX (with dividends) had CAGR of 12.4% with stdev of 14.5%. Without dividends, CAGR was 9.45%.

Using Faber's 10month SMA timing strategy, for SPX May 2000 to May 2008 (including dividends and assuming 3% APY on cash) the CAGR was 7.27% with a stdev of 7.34%. That's 6 times the return at half the risk (if you view that stdev is a proxy for risk).

Diversification. And tactics:
Get ahold of Faber's paper. http://ssrn.com/abstract=962461

Also look at the righthand column of page 2 of this article.

More details: http://www.jennisondryden.com/view/upload?docURL=/WDocs/45FB...
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