Thou in the DowAug 8, 2012 By Steven R. Peck
A year ago today, American stock markets were in a frightening position. On Aug. 8, 2011, one of the three big credit rating agencies, Standard & Poors, had downgraded the rating of the United States -- not a corporation or a billionaire -- but an entire nation by one notch on its rating scale.
The move meant that in the opinion of S&P, the United States of America no longer was as good a risk to pay its debts as the other most-reliable nations on Earth.
It was a crushing embarrassment to the U.S. and was viewed as a potentially devastating development for the world economy. It happened during a period of seemingly irreparable disagreement between Democrats and Republicans in Congress over whether the U.S. debt ceiling ought to be raised to permit payments on money that already had been borrowed.
The details were misunderstood by many Americans, but there was no mistaking the effect the congressional stalemate and the drop in the U.S. credit rating had on the stock market. In Aug. 4, at the peak both of the gridlock in Washington and the credit rating threat, the Dow Jones Industrial Average plunged 573 points in a single day, nearly 5 percent of its value. Two trading sessions later -- the day of the downgrade -- there was an even bigger fall, this one 635 points. It was one of the 10 biggest one-day drops in history, representing the loss of another 5.6 percent of market value.
That was a bad time in America if you had a mutual fund for college, a 401(k) account for your retirement, or a market-based pension or retirement fund at work.
Pessimism abounded, particularly considering the fresh, sore memories of the terrible market losses from 2008-09 at the height of the recession. Things looked bad if you had an investment any more sophisticated than a coffee can in the closet.
In our newspaper office, two staff members in particular were so stung by the news that both wondered aloud whether the market could recover. They weren't alone. Dozens of newspaper stories, TV newscasts and famed talking heads of round-table discussion groups echoed the worry. How deep would this go?
So we decided to try an experiment. Suppose you had $1,000 to spare, and you decided to invest in a stock market account based entirely on how much the Dow Jones Industrial Average rose or fell each day. These accounts do exist. They are called index funds.
In our imaginary account, we decided to leave the "money" alone for exactly one year to see what happened. Every week since, we've updated the progress, or lack of it, in a "Tuesday notes" paragraph called "Thou in the Dow."
A year later, we wish we'd done more than imagine Thou in the Dow. It would have been a heck of an investment.
As of Tuesday morning, a year to the day after the second of the two troubling plunges on the stock market, that thousand bucks would have grown to $1,156.46. The one-year return on the investment would have been 15.64 percent.
It took a big rally right at the end of the 12-month test run to get there. On Friday morning it was worth $1,133.06. As recently as July 24 -- just nine trading sessions ago -- it stood at $1,113.85.
Things weren't always looking up. The lowest the Thou in the Dow ever got was Oct. 3, 2011, when it fell to $957.51. But it never stayed below $1,000 for more than five days.
It stayed in the $1,040 to $1,070 range for many weeks before rallying strongly around the holiday season and at the first of the year. It first topped $1,100 on Jan. 18 and rarely fell under that level again.
The fund peaked at $1,160.01 on April 2, so the "closing date" Monday showed the fund near its 12-month high.
There are no investment wizards in the daily newspaper office. We do have a 401(k) plan for staff members, and it did take a real thrashing last summer and fall. But one thing years of putting together a national news summary every day has demonstrated is that the market never stays down. A week, a month, even a few months, but even a period as tumultuous financially and politically as the past year has been wasn't enough to hold down the stock market.
Thou in the Dow reinforced age-old principles of investing: Don't invest more than you can afford to lose. Contribute regularly. Be patient. Think long term. Trust history --¬and remember, there are no sure things in the world of money.
After the election in November, we might try a new, slightly different experiment, using the election of a new president or the re-election of the current one as the basis. Thanks for following Thou in the Dow.