In a moment, we’ll show you a couple of charts.
No doubt you’ve seen them before.
One shows the “lost decades” after the Great Depression where stocks didn’t regain their highs until 1954.
The other shows the great returns from investing in gold in the 1970s and holding on to it through the peak in the early 1980s.
Most gold bugs then compare that to the S&P 500… which went almost nowhere (mostly down, in fact) during that timeframe.
Trouble is, those charts don’t tell the full story.
We’ll show you why today. First, today’s market action…
These Charts Tell the Full Story
Here are the charts in question. We know you’ve seen them before. First, the one covering the 1929 market crash and the aftermath:
Source: Bloomberg
According to popular belief, an investor who invested at the top of the market in 1929 (we’re sure many did) wouldn’t have gotten back to breakeven until 1954.
And even those investors who bought after the crash had to wait a long time before making a meaningful return.
The second is the gold chart from the 1970s through the early 1980s:
Source: Bloomberg
With this chart, again according to popular belief, buying and holding gold was much better than owning stocks. Hard to argue with that chart.
Adjusted for inflation, it’s about a 766% return. Meanwhile, stocks (not shown on the chart) would have seen you lose around 11% over the same timeframe… And that’s even assuming reinvestment of dividends.
Based on that, it’s an open-and-shut case.
Except, as we say, it doesn’t tell the full story. Let’s look back at the first example – the “lost decades.”
What that chart doesn’t show you is the inflation-adjusted return including dividend reinvestment. When you factor that in, you get a completely different story.
Instead of being significantly down, and struggling to just get back to breakeven by 1954, the investor was pretty much back to breakeven (adjusted for inflation) by 1937…
Source: Officialdata.org
…and then began surging ahead from 1943 onwards. All while there was a war, mind you!
To the extent that by 1954–55, adjusted for inflation, the investor was up over 600% on their portfolio.
Now take the second chart. It’s hard to counter the case for gold. But we’ll do so, not to say that owning gold is a bad thing, but rather that it’s a mistake to just rely on gold as a “hedge against inflation”… or as insurance against “the end of the world.”
First, let’s stretch out the gold chart to 2000 and look at the inflation-adjusted numbers:
Source: Macrotrends.net
After that big surge in the 1970s through 1981, the gold price (adjusted for inflation) fell around 60% over the following two years.
By the early 1990s, it was down more than 70% from the peak.
And by 2000, the gold price was down 82% from the peak, and adjusted for inflation, it was by that time only up 46% from 1971.
Now. if we look at the S&P 500 over the same full period – 1971 to 2000 – adjusted for inflation and with reinvested dividends, we get this picture:
Source: Officialdata.org
Every $100 invested in 1970 was worth $909 in 2000. That’s a better than 800% return.
Sure, you could time the market… into gold in 1971… out of gold in 1980… and into stocks for the rest of the ride. That would be one big return.
The reality is that most investors don’t have the stomach to make those kinds of big bets… nor should they.
The point we’re making is the big flaw of the investors who shout loudest for gold as the best “inflation hedge” tend to be those who only buy gold… They never buy stocks.
That means they experience the excitement of big gold bull market rallies… but then sit in frustration as their gains slide away… and never take part in the often even bigger stock rallies.
Now, we know some folks will say that a 30-year time horizon is a long time, and it’s not representative of most investors. Of course, that’s completely false.
In fact, a 30-year time horizon is probably the minimum for the typical investor. A 60-year-old investor today, who has seriously invested for the past 20 years, likely has at least another 20 years where they’ll need to manage their investments one way or another.
That means it’s rarely too late to think about the medium to long term. Too often, folks nearing or just in retirement think they only need to plan for the next five years.
Wrong.
Longer-term planning is still important. And the good news is that the power of compounding, by reinvesting dividends, can still benefit you in shorter 10-15-year timeframes.
That’s why we like the sound dividend payers. Sure, you won’t get the exciting pops that you’ll get from a tech stock. But on the plus side, you know your sound dividend payer is likely to still be paying a dividend five or 10 years from now.
Will the exciting tech stock still be around?
Our preference is almost always individual stocks. But we also know that it’s not always easy to pick the best handful of dividend payers at the best price at the best time.
Because of that, often investors can become paralyzed and end up doing nothing. So a great alternative is to buy into one or more of the thousands of exchange-traded funds (ETFs) on the market.
For example, the iShares Global Consumer Staples ETF (KXI). It gives investors exposure to some of the world’s biggest and most well-known brand names.
Over 58% of the holdings are for U.S. stocks, including companies such as Procter & Gamble, Walmart, and Coca-Cola. But it has exposure to the U.K. (11%), Switzerland (8%), and others making up the balance.
That gives you a shared investment in the likes of Nestle, Unilever, and L’Oreal.
KXI pays a 3% dividend yield, and the stock price has gained 213% since 2009. That’s an annual average return of 7.9%.
An alternative is the more U.S.-focused SPDR Consumer Staples ETF (XLP). It’s up 276% (9.3% average annual return) since 2009 and pays a dividend yield of around 2.5%.
If you can get an average 9% capital growth on a stock plus a 2.5% dividend yield… And if you’re able to reinvest some or all of that yield back into stocks… You’re going to do just fine.
Look, we’re never one to say you should avoid growth. Growth stocks and investments are great for the shorter-term hit you can get from seeing the stock pop higher each day.
Just make sure you’re not overexposing your portfolio to the excitement of growth at the expense of dividends and reinvested dividends.
Over the long term, collecting those dividends and reinvesting them is often the best path for growing your wealth.
Regards,
Kris Sayce
Editor, Legacy Research Group