Monday, January 4, 2010

Common Knowledge about Stocks

It’s common knowledge that 2009 was a terrible year in the stock market. But a quick look at the numbers shows that an investor in the TSX composite index using the iShares capped ETF (ticker XIC) with reinvested dividends would have made 33.5%! That’s a great gain.

Just a minute, some readers would say. People are lumping in the losses in late 2008 as well when they say that stocks have performed poorly. Fair enough. Taking 2008 and 2009 together, XIC with reinvested dividends lost 5.6% per year. This isn’t exactly devastating, but it’s no fun either.

What about an investor who made regular dollar-cost averaged investments of new money in XIC over the past two years? This new money that was invested for between zero and two years would have actually made a gain of 13.5%.

These actual figures contrast sharply with the despair felt by investors through the depths of the paper losses in March 2009. It’s clear that those who stuck to a long-term plan either lost little or actually made money, and those who sold out during the stock price lows were the ones hurt the most.


  1. How about folks who invested in the Ukranian index?

    A good year to have a large sum of money appear and then invest in a lazy index fund, I guess (so I hear).


  2. Big Cajun Man: The tricky bit is to start with a large sum of money.

  3. "Theory is great, practice is what kills us" is an old saying. You do well, Michael, repeating this but sometimes individual conditions prevent this wise method of investing. What nobody points out when preaching this - it should be common knowledge by now after how much it was written on its subject: invest monthly not randomly - but nobody seems to have studied the social conditions. When one has steady disposable income one can count on, then joining a monthly automatic investment plan, makes sense. Unfortunately this is not the case for most of the people, and especially in the new economy. As an IT specialist, I changed 14 (fourteen) jobs in 10 years, with 2 occupying 4 1/2 years. While I kept on making good money, I never knew in August how my situation will be in October and that hampers doing the wise thing. At least I know it's better investing somewhat badly than not saving/investing at all.

  4. Andi: Dealing with variable income is definitely a challenge. It's true that some people were forced to sell investments at bad times due to job loss. But more investors sold out of fear than out of need.

    I actually don't see a problem with investing randomly if you receive money you can invest at random times. The problem comes when you hold back from investing when prices are low and things look scary.