Evaluating A Buy and Hold Strategy for the S&P 500 Index
In this paper, we calculate the real rate of return from purchasing the S&P 500 index from 1871 through 2001. We assume the investor purchases the index in January of each year and holds it forever, consuming dividends, but never selling the index itself or else selling it after its present value is dwarfed by the present value of the dividend flows. The calculations rest on best guesses about post 2000 dividends. These we infer from past behavior. The highest real return was 13.02% for a purchase in June 1932. The lowest was 2.88% for August 2000. The expected return for a purchase in January 2001 was 3.08%. To raise it to the 5% that we judge the minimum return necessary to maintain investor interest, the S&P 500 index would have had to fall by 53% from its January 2001 value of 1336 to 624.
|Date of creation:||2002|
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