Stock Market Needs ‘Knights of Faith’

In a recent Wall Street Journal article, columnist Jason Zweig argues that it’s now easier for investors to recover losses after a market dip due to lower trading costs and advances in technology.

Even though investors are facing a situation in which future stock returns “may well be lower than the past decade’s lavish annual average of nearly 14%,” Zweig writes, “we should thank our lucky stars for living at a time when we can capture nearly all the return stocks produce.”

Zweig cites S&P Dow Jones Indices data showing that, before 1987, the Dow wasn’t calculated on a total-return basis, adding that the early equivalent of the S&P 500 “wouldn’t have broken even with its 1929 high until the end of 1936—and wouldn’t have stayed in the black for good until late 1949.”

Zweig elaborates: “To plow dividends back into a broad basket of stocks in exact proportion to their makeup within the index, without paying any management fees or trading costs, investors would have needed magical powers.” He notes that, “incredible as it sounds,” mutual fund companies used to charge investors to reinvest their dividends.

Total return, Zweig argues, “isn’t just a concept; it’s also a technology.” He explains that for most of the 20th century, we didn’t have the technology available to allow the typical investor to reinvest dividends efficiently, that “greedy middlemen” and “clunky technology” ate into investor returns.

Without access to what he refers to as today’s “total-return technology,” Zweig argues that “the odds a typical stock investor broke even in less than a decade after 1929 are close to nil.” This, he contends, bolsters the argument in favor of buy-and-hold investing, although he says no one can predict how long the hold will have to endure. Channeling the teachings of philosopher Soren Kierkegaard–who referred to those who could hold on against all hope as “knights of faith”–Zweig concludes, “Once or twice a century, it may take longer than anyone can imagine.”