EXAMPLE 8 Getting rich in hindsight

The end of the twentieth century saw a great bull market (a period when the value of stocks rises) in U.S. common stocks. How great? Pictures tell the tale more clearly than words.

Look first at Figure 10.9. This shows the percentage increase or decrease in stocks (measured by the Standard & Poor’s 500 index) in each year from 1971 to 2011. Until 1982, stock prices bounce up and down. Sometimes they go down a lot—stocks lost 14.7% of their value in 1973 and another 26.5% in 1974. But starting in 1982, stocks go up in 17 of the next 18 years, often by a lot. From 2000 to 2009 stocks again bounce up and down, with a large loss of 37% in the recession that began in 2008.

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Figure 10.9: Figure 10.9 Percentage increase or decrease in the S&P 500 index of common stock prices, 1971 to 2011, Example 8.
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Figure 10.10: Figure 10.10 Value at the end of each year, 1971 to 2011, of $1000 invested in the S&P 500 index at the end of 1970, Example 8.

Figure 10.10 shows, in hindsight, how you could have become rich in the period from 1971 to 2011. If you had invested $1000 in stocks at the end of 1970, the graph shows how much money you would have had at the end of each of the following years. After 1974, your $1000 was down to $853, and at the end of 1981, it had grown to only $2145. That’s an increase of only 7.2% a year. Your money would have grown faster in a bank during these years. Then the great bull market begins its work. By the end of 2011, it would have turned your $1000 into $36,108. Unfortunately, over the next 10 years as a whole, stocks lost value, and by the end of 2009, your $36,108 would have declined to $32,818.