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Friday, 03/14/2003

So what really have we done since then? Part 2
by Steve Gail

In our last article we demonstrated how both the Dow Jones Industrials and the Standard and Poors 500, both were able to produce over 9% returns over a 10 year period. We also noticed that the 10-year period included a lot of turmoil for the market, with 9-11, the NASDAQ debacle, corporate fraud and a presidential election that had to be decided by the courts. This section of the article will examine just how well DRIP related programs with in the market, as well as Standard and Poors 500 companies and the Dow Industrials performed over time against the 30-year Bond and inflation, as we compare all of them against the consumer price index. (This index measures the changes in prices of goods and services purchased by urban households. Many pension and employment contracts are tied to changes in consumer prices, as protection against inflation and reduced purchasing power.)

An issue that a lot of DRIP buyers sometimes miss, is the real value or the future value of money when they examine their investment results. The most apparent oversight is DRIP buyers do not take into consideration the erosion of their investment due to inflation. One must also examine just how much those investment dollars will buy when liquidated based on the prices are the time of liquidation. It really doesn't make much sense to have your investment increase by 12%, if the rate of inflation has gone up 15%. Then when you add taxes, you have actually lost money in terms of spending power. In essence, you lose when you think you win. Today we will graphically look at how well the following indexes will hold up overtime against the 30-year bond and the consumer price index. EXHIBIT A:[ source morningstar ] As you can see below eventhough the Dow industrials and S&P have gone through some bearish periods, if we look back to 1996 we can still see that even with all that downward activity, which included the Asian flu, Greenspan's robust exurburation of the market retorts, the NASDAQ bubble, Corporate Fraud and now a potential war with Iraq. The Dow Industrials still shows a higher annualized return then the ultra conservative 30-year T- Bond Yield while of course still staying ahead of the consumer Price Index. EXHIBIT A ( below) [source morningstar]

EXHIBIT B: [ Source Morningstar ]

However, if we examine the Standard and Poors 500, the story isn't as quite pleasant. The S&P 500 underperformed the 30-year T-Bond by 1.77-% points and it you subtracted for inflation by taking the CPI index away from the S&P total return you will see a net return of 1.78%. So if one were evaluating risk and reward one would need to take a hard look before determining if the risk was worth it, especially if one examines the chart below slowing just how consistent the T-Bond Yield was over time. (See EXHIBIT B Above). However from Exhibit B we can also make several other observations.

1. 1997-1999 the Dow Industrials and S&P significantly outperformed the 30-year T-Bond Yield and in bullish market environments this is what bull markets are meant to do. So as a DRIP investor you are going to see numerous market run ups and declines in the life of your DRIP program, because by its design, it is a LONG-TERM INVESTMENT COMMITMENT. As a DRIP investor I can not impressive upon you how important it is to realize that you are in a long-term scenario commitment.

2. 2000-2002 the Dow and the S&P had to weigh through the experience of all the negativity that I mentioned in the beginning of this article. So, considering all the doom and gloom that has been transpiring over the last 3 years a DRIP program that has automatic reinvestment of dividends and an optional investment program was and is picking up a lot of shares at these lower prices. So the issue is not if, but when the next bullish market trend begins, these shares accumulated over the last 3 years are going to participate and the if you continue with your auto reinvestment programs, one day that should happen. (Revisit my article on Dollar cost averaging in February). Next week, as the Oscars take the stage, we will examine individual DRIP companies that have shown some of the best performances both in Return and Dividend Yield from 2002.


So until next time


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