A Real World Example

I like to see how the market is doing each week, so I check out a few numbers, one being the Dow Jones Industrial and the other is the S&P 500.  Both are a selection of the largest stocks in the market and the numbers represent how the stocks have grown or shrunk in value.  Each morning when I turn on the news, since I live on the west coast, I get to see the opening of the stock market at 6:30.  After that, I get to see the Dow Jones and S&P numbers as they rise and fall.  The market is up today because of .....  The market is down because....  I am never really sure what to believe other than the numbers. 

For instance, sometimes the market increases because some big companies have laid off workers, with the assumption that less money given to payroll will add to the value of the company.  The next day the market drops because of rising unemployment.  That never makes sense to me, but that is the world in which I live.  As an investor, the best I can do is read, watch the market and pray.  Or I can do what a lot of other people do which is to put my 401k money into some funds that HR suggested, and then ignore them from then on.  Frankly, that is what I did for a long time and now I see the error of my ways. 

When I started this blog, I mentioned that I had spoken to a friend who showed me how I could be safer putting my money in an annuity rather than leaving it in my IRA.  I had complained that my money had not grown at all in the ten years that I had held on to it.  How could I possibly expect to live off money that wasn't even growing? 

What I got was a program that let's me still invest in the market and I can take advantage of the growth.  When the market goes down, the annuity pays me 6% until the market recovers.  The program isn't free, so I decided to do a bit of math to see if I was getting a good deal.

If you go to a web site called http://www.moneychimp.com/ and go find the Advanced CAGR or Compound Annual Growth Rate of the stock market.  There I found the percent change in the S&P 500 over the last 10 years.  Between 2000 and 2010, the S&P 500 rose, on average a little over 2%.  Really?  Here are the numbers.

S&P Annual Percent Change   

2010        14.32 

2009        27.11

2008       -37.22    

2007          5.46

2006        15.74     

2005          4.79

2004        10.82     

2003        28.72     

2002       -22.27    

2001       -11.98    

2000         -9.11     

Avg Return         2.40 

Here is how this looks graphically.

Another way to look at this is to add some money to it and see where it goes.  Let's take me, for example.  Over the years, I had managed to accumulate $100,000 in my 401k that I had rolled over to an IRA.  A popular way to invest was, and is, to put it into an index fund.  For instance, if I put my money into a fund that matched the S&P 500, my money would keep up with the market.  In 2000, that sounded like a pretty good idea since I could never keep up with all the changes.  So, let's see what happened to my money when I put it into the S&P 500 Index Fund and let it ride.

Keeping my money in that fund let it grow from $100,000 to $108,000.  Is that magic, or what?  Where did my money go?