Wednesday, December 12, 2007

Investing in the 1970's

What can we learn from Investing in the 1970's? Will the same trends in the 1940's, 1950's and 1960's hold true in the 1970's?

The table below shows the performance of small cap stocks, large cap stocks, long term bonds, and short term bonds during the 10 year period of 1970 - 1979, as found in the book titled Investments by Bodie, Kane, & Marcus. This period includes high interest rates (20% interest rates on mortgages), high commodity prices ($2.00 gas and $800 gold) and stagflation. Today, the interest rate for mortgages are lower and commodity prices have rebounded with gold about $800. Did anyone make money during this period? What investment did the best?

If $1,000 was invested on January 1, 1970 here is how the numbers came out:

Small Cap Stocks = $2,314
Large Cap Stocks = $1,774
Long Term Bonds = $1,900
Short Term Bonds = $1,840

With the high interest rates, the return on bonds got much better. With the high inflation rate during this period the increases in bonds just kept up with inflation. Small cap stocks came in first with large cap stocks, long term bonds, and short term bonds essentially equal. The high inflation rate sure did change the trend from the 40's, 50's, and 60's.

Below is a table of the value of the $1,000 investment at the end of each year.

Year /Small Stocks /Large Stocks /Long Bonds /Short Bonds
1970 /835 /1,041 /1,127 /1,065
1971 /989 /1,189 /1,324 /1,111
1972 /982 /1,416 /1,397 /1,154
1973 /584/1,207 /1,417 /1,233
1974 /410 /888/1,495 /1,331
1975 /696 /1,219 /1,622 /1,408
1976 /1,077 /1,512 /1,802 /1,480
1977 /1,314 /1,402 /1,818 /1,555
1978 /1,607 /1,493 /1,742 /1,666
1979 /2,314 /1,774 /1,900 /1,840

  1. Stocks had a lot of volatility during this high inflation period
  2. Bonds to a better job of providing account balance stability
  3. High inflation is not good for stocks or bonds
  4. Bonds had better returns with high inflation
  5. Stocks need to be held with a longer term perspective
  6. You can not time the market
  7. Stocks had up and down years
  8. Long term bonds lost money 1 of the 10 years, so it is possible for a bond to lose money
  9. Short term bonds never lost money in a year
  10. Small cap stocks had more volatility than large cap stocks

The trends of the 1940's , 1950's, & 1960's did not hold true in the 1970's. The high interest rates and high inflation rates sure did change the trends. Thankfully, we are not in a high interest rate and high inflation period. Investors in bonds had stability. It is important to know what you want your investments to do and act accordingly. It is not possible to predict the future value of an investment and diversification can smooth out some risk.

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