Secular Bear Market Myth    (Updated 8/4/08) I know market timers use secular bears as their justification for market timing. What I didn’t know was that one of the “classic” secular bear markets (1966-1982) was a myth. The following is part of a discussion I had with someone at Suite101.com. His comments are indented and in italics. My replies are in regular font. Well, the market was about nominally flat from 1966 to 1982. Not true. According to Ibbotson’s data, the S&P 500 returned 6.8% annualized during the period 1966 to 1982. Here’s my handy stock market returns calculator for any period starting from 1926. But check out what it looks like after adjustment for inflation! Positively gives you the shivers. Unfortunately, inflation acts on bonds and cash as well as stocks. Inflation-Adjusted Growth of $1000 from 1966-1982 Stocks (S&P 500), Bonds (5-Year Treasuries) and Bills Data obtained from my Mountain Spreadsheet (xls) So yes, there were few places to hide with inflation so high during that period. I don’t have the numbers for small-caps, but I believe they held up well during the period, especially from 1975. My chart of the period shows the Dow hitting 1000 first at the beginning of '66, then late '68, then briefly topping it in late '72 - early '73, then again in '76 and early '77, then again in late '80 - early '81, before finally breaking through in late '82. If that’s a total of 6.8% for the S&P for the 17 years, that’s hardly much better! (Or, maybe he’s calculating total returns, including dividends.) Yes, Ibbotson calculates S&P 500 total returns, which includes reinvesting dividends. Your Dow chart only shows price which doesn’t include reinvested dividends. The Dow total return index would likely have similar annualized average return to the S&P 500 total return index. Just to repeat, the 6.8% return is annualized, not total cummulative return. The total cummulative return was 206%. This means that the S&P 500 tripled (in nominal value) during the period as I will explain. Here is the actual S&P500 total return data series from Ibbotson. Numbers are at year-end. You will notice the year-end 1982 value is three times as great as the year-end 1965 value (or beginning of 1966). 1965    53.008 1966    47.674 1967    59.104 1968    65.642 1969    60.059 1970    62.465 1971    71.406 1972    84.956 1973    72.500 1974    53.311 1975    73.144 1976    90.584 1977    84.077 1978    89.592 1979   106.113 1980   140.514 1981   133.616 1982   162.223 Later, I became curious about small-cap stocks during the 1966-1982 period. What I found was truly astounding. Again, the numbers (representing year-end) are from Ibbotson. If an investor owned an equivalent mutual fund (tax-sheltered), they would have made 10 times their money! 1965    72.567 1966    67.479 1967   123.870 1968   168.429 1969   126.233 1970   104.226 1971   121.423 1972   126.807 1973    87.618 1974    70.142 1975   107.189 1976   168.691 1977   211.500 1978   261.120 1979   374.614 1980   523.992 1981   596.717 1982   763.829 So, the people calling the 1966-1982 period a secular bear market are obviously ignoring the other areas available in the stock market. I think the lesson here is clear. A broadly diversified portfolio, like ‘slice and dice’, should serve long-term investors better than one devoted solely to U.S. large-cap stocks.