What should investors do concerning the situation in the Ukraine? That depends. What does the current crisis in the Ukraine have to do with your ability to provide income for you and your spouse for the rest of your lives?
We understand the difficulties that our clients and others have trying to stay focused on the long-term under this onslaught of hourly news coverage. The media’s job is to focus on the here and now and try to extrapolate deep meaning to every move that occurs on a daily basis.
Therefore, investors have been subjected to the never ending dire predictions about oil spills in the Gulf, to bird flu epidemics to the disintegrating stability of the Middle East (Now that is new, huh).
To counter the 24/7 news cycle, we constantly discuss that the long-term trend of owning the great companies in the United States and the world requires a much longer focus than the news cycle would have you believe. And most importantly, you do not need to predict how these events will turn out; you just have to have faith that most of the companies will take the necessary actions to remain profitable over the long term.
As a way to help bring this reality to light, as well as trying to get one to focus on the proper time perspective, let’s take a look at how the largest companies in the United States have done over a 30 year time horizon. These U.S. companies are best captured by an index known as the S& P 500. We will use these companies as the proxy for large worldwide companies.
The Standard & Poor’s 500 index includes the 500 leading companies in the most important industries for the United States economy and captures approximately 70% to 75% of the total value of the U.S. stock market. The index number is not as important as the percentage change over time. By looking at the index number, one can get a representative understanding about how the value of these companies have changed through time.
We discuss the 30 year time horizon frequently as this is to approximate the retirement duration that most couples will need to consider when planning their income needs in retirement. Below is a chart that shows a date, the corresponding S&P 500 index value, and the earnings per share of theses companies.
We begin this review 30 years ago with a stop at 15 years ago before looking at the present. Remember during this time period, we have had 2 of the worst stock market declines since World War II: the technology bubble collapse in 2000 and the latest calamity which occurred in 2008.
Date S&P 500 Index Value (1) Earnings Per Share (1)
Jan. 1, 1984 165 $33.15
Jan. 1, 1999 1,229 $54.00
Sept. 1, 2013 1,681 $94.28
Sept. 1, 2028 ?? ??
Most people are quite surprised when they see these numbers especially if they have been paying attention to the news. Our belief is that their surprise is due to the incessant negativity that surrounds the daily activities throughout the globe without understanding the incredible power that capitalism has to adapt to the ever changing landscape. The companies has increased substantially along with their corresponding profits.
What will the value of these companies be in 15 years? You can see that the index value reflects the reality that the company earnings generated have steadily increased over time. Earnings are perhaps the single most studied number in a company’s financial statements because they show a company’s profitability. As we have written in other posts on this site, these companies are well-positioned to support the next wave of the world’s population as they leave poverty.
For investors facing a 30 year plus retirement, it is essential to own these large US companies as well as the other 10,000+ publicly traded companies throughout the world who will be benefactors of this growth.
Let the politicians worry about solving the current crisis in the Ukraine and the next worldwide crisis. Your task is much more local.
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S&P 500 Earnings Per Share. 12-month real earnings per share — inflation adjusted, constant January 2014 dollars.