Unexpectedly Intriguing!
08 October 2008

Worst Case Real Rates of Return for the S&P 500 for Investment Holding Periods Ranging from One Year to 50 Years Today, we're going to introduce a bold investing strategy that's so daring that, well, let's just say that it's not for pansies....

Let's introduce the strategy by revisiting our own archives, specifically, a post from 15 February 2007 in which we identified the best rates of return ever obtained for investments in the S&P 500 index for holding periods ranging from one to fifty years. Here are our comments, where we recognize a unique correlation between the worst stock market returns and the best (emphasis ours):

Unlike our previous look at the worst case real returns for the S&P 500, the best case performance for investments made in the index are largely defined by the year in which they begin, instead of when they end.

For this analysis, we found that five periods account for 84% of the best periods in which to have made an investment. The best, by far, is for investments made in 1932, and more specifically, in or around June 1932, which accounts for 32% of the best case holding periods for investments made in the index of 1 to 50 years in length. The other periods that are defined by the years in which they began include 1920-1921 (26%), 1942 (10%), 1980-1982 (10%) and 1949 (6%).

More interestingly, the periods in which the best real returns were obtained seem to be largely correlated with the end of the periods in which the worst real returns were achieved for investments made in the index!

If nothing else, this observation does suggest a unique stock investing strategy. Should the market ever break its records for worst case real return performance, that may be a really good signal that it's a really good time to go "all-in"!

Do you have the guts for that kind of strategy? If so, continue reading....

No Pansies Allowed Below This Point....

Assuming you're still with us, let's be up front about the risk. While it's unlikely you would lose all your investment, you might lose a substantial chunk of it. This is a highly speculative strategy to say the least, one that would require you to buck widespread fear and panic running amuck in the stock market. The amount of your investment should be an amount of money that you're very comfortable entirely forgetting about ever having.

Adding to the insanity, this strategy relies on you to ride out the worst the market might dish out over the period that you hold your investment as a buy and hold type investment. That's good news for today's stock market, given the restrictions that have been placed on shorting stocks, the more traditional way to make money from falling stock values.

The figures we'll present below only apply for the month of October 2008. We're going to identify the share price threshold that the S&P 500 index would have to average for the month of October 2008 in order to be equal to the worst ever recorded nominal rate of returns for holding periods ranging from 1 month to 10 years in length.

In doing that, we're going to disregard the effects of inflation but will incorporate the effects of dividend reinvestment. The reason why is because many of the very worst rates of return ever recorded are associated with periods of deflation. If we incorporated that data, those rates of return would be higher than if we did not! Another advantage is that you will be able to compare the data from the historic record to confirm the results with actual non-inflation adjusted numbers.

In execution, the strategy is really simple. If the market equals or breaks below the average monthly index value targets in the table below, that's your signal to pull the trigger and invest for the length of time represented by the indicated holding period. Once again, the figures below apply only for the month of October 2008. They do not apply for any other month:

"Trigger" Values for Worst Case Investing Strategy for October 2008 for Various Holding Periods
Holding Period [Months] Holding Period [Years] Worst Ever Annualized Return for Holding Period "Trigger" S&P 500 Index Value
1 0.08 -97.4% 896.10
2 0.17 -91.6% 844.54
3 0.25 -87.4% 743.66
4 0.33 -78.1% 795.31
5 0.42 -70.4% 836.36
6 0.50 -68.9% 755.90
7 0.58 -70.7% 634.97
8 0.67 -66.8% 640.30
9 0.75 -68.0% 576.64
10 0.83 -69.4% 540.83
11 0.92 -66.9% 520.89
12 1.00 -62.3% 568.24
15 1.25 -61.5% 449.00
18 1.50 -50.6% 493.23
21 1.75 -53.4% 361.91
24 2.00 -49.3% 337.01
27 2.25 -47.7% 280.20
30 2.50 -41.5% 325.04
33 2.75 -46.1% 221.23
36 3.00 -40.2% 240.71
39 3.25 -36.5% 262.27
42 3.50 -32.8% 271.67
45 3.75 -28.8% 307.39
48 4.00 -25.1% 325.54
51 4.25 -23.0% 336.17
54 4.50 -20.8% 364.41
57 4.75 -19.2% 378.03
60 5.00 -17.3% 366.84
63 5.25 -15.7% 368.54
66 5.50 -16.3% 302.70
69 5.75 -13.0% 361.54
72 6.00 -11.8% 360.39
75 6.25 -9.9% 420.30
78 6.50 -9.0% 534.97
81 6.75 -7.5% 599.04
84 7.00 -6.2% 608.56
87 7.25 -5.3% 714.79
90 7.50 -4.7% 729.35
93 7.75 -4.7% 802.76
96 8.00 -5.9% 742.13
99 8.25 -6.9% 710.55
102 8.50 -7.2% 669.59
105 8.75 -6.9% 657.17
108 9.00 -5.1% 697.47
111 9.25 -4.4% 779.48
114 9.50 -4.3% 750.16
117 9.75 -4.7% 667.30
120 10.00 -4.0% 583.25

Did we say anything about this investing strategy not being for pansies?

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