The SP500′s lost decade

SP500, CPI, monthly, March 2002 to March 2012

Are you a buy and hold index investor? This strategy was widely touted for many years as an alternative to active trading. Between capital gains taxes and transaction costs, the argument went, your money was much better of in a passively managed, low cost index fund. After all, actively traded products try to beat the market, and an index fund is the market!

Bad move. The chart above shows both the S&P 500 and the CPI (Consumer Price Index) over the past ten years. During that time the S&P 500 has returned 15.89%, so what’s the problem? At the same time inflation has surged, with the CPI up 23.81%. So in real (aka, “inflation adjusted”) terms you have a return of -6.40%. That’s what investing in passive products got you over the last decade.

Myself, I won’t purchase any stock that doesn’t pay a dividend. I like regular cash flow an don’t mind being taxed on cash I’ve already got in hand, rather than the possibility of paying much lower capital gains taxes on money I might never have.

Of course the argument still rages regarding wether we’ll see inflation or deflation as the global financial system continues to emerge from The Credit Crunch. And some folks don’t trust US Government inflation statistics at all.

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