Rekenthaler Report

30 Years of Living the Bull-Market Life

John Rekenthaler

My 30-year Morningstar anniversary has arrived. It sparked reflection. Had I a time machine, what investment advice would I give my younger self?

Buying  Apple (AAPL) stock in 1996 and shorting collateralized mortgage obligations in 2008 would have been useful tips. For this article, however, I will bypass science fiction and offer counsel that is more realistic: Live during a stock bull market.

That comment is not tongue in cheek. Bonds sometimes post high after-inflation gains. Even, on occasion, does cash. But among the major financial assets, only stocks have the potential to deliver performance that does more than preserve and modestly extend wealth. Stocks can create fortunes. Investing in equities, through a stock bull market, is an investment experience like no other.

My first mutual fund serves as a real-life example. In March 1988, I placed $1,000 in a newfangled account called an "IRA." The investment was Nicholas II (NCTWX) a small-company U.S. stock fund. Since that time, I have left the fund untouched, to accumulate. And accumulate it has. Today, that $1,000 is worth $14,834.

Had I bought a small-company index fund, which did not exist at the time, that account would likely be larger. One thousand dollars placed into the Russell 2000 Index in March 1988 would have grown to $15,832. That index is costless, while an index fund must pay expenses, so in real life, indexing's victory margin would shrink. But the index fund, were it available, probably would be ahead.

What Matters
C'est la vie. (Easier to write than to say. As Mark Twain wrote, foreigners spell better than they pronounce.) If stocks return 10% annually and inflation is 3%, it's difficult to go wrong with equities. High costs, mistimed trades, poor manager selection … the mistakes wash away. To be sure, such decisions matter. Best to get them right and maximize one's profits. Nonetheless, the critical decision was to hold stocks. Better to be dumb with equity than smart with bonds.

The stock market's performance continually amazes me. Perhaps because nobody on either side of my family invested, I have never lost my sense of awe at how equity shares increase in value, without their owner's involvement. To get paid, one must work … right? But Nicholas II has paid me handsomely for standing by. Money for nothing.

Building a Fortune
Handsomely, in fact, understates the matter. The fund hasn't yet had time to create a fortune, all by its lonesome, but if it continues on the same path, it will.

Here is the analysis. To start, that 15-fold gain should be adjusted for inflation, which has been a cumulative 113% since 1988. Thus, the fund's real gain has been about 700%. Had I defined a fortune in 1988 as consisting of $1 million in that day's money, then I would have needed to invest $140,000--a handsome amount for the times. Building a large fortune by making a single investment at the beginning of my career was possible, but only by starting with a small fortune.

However, my time is not yet up (I hope). I am not required by federal regulation to withdraw from that IRA for another 12 and a half years. Even then, the first several years' distributions will leave most of the account intact. Assuming that my health holds up, and that I have no immediate need to spend the money, my Nicholas II investment could have an effective life span of another 20 years, roughly speaking.

If so, and if the fund were to perform as it has in the past, then that 700% after-inflation increase would become 2,500%. (Compounding occurs at a steady rate on a logarithmic scale but is wonderfully convex when it operates on actual dollars.) Now we're talking. Reaching that hypothetical goal of $1 million, as defined by 1988 dollars, would have required a $40,000 initial outlay. Beyond my means at the time, but not an inconceivable sum for somebody in his late 20s.

Changing Times?
Of course, this exercise only involves one purchase, with no further activity. In real life, the stock market mathematics are far easier, because people typically invest on an ongoing basis. If they do so with equities, stay the course for several decades, and stocks perform anything like they have during my working career, today's young workers will fare well.

In 1988, I bought stocks because I landed a position at an investment-research company. Had that accident not occurred--and it was indeed an accident, as I was neither trained in the subject (a situation that I have since rectified), nor particularly seeking such work--I would not have purchased equities that year, and probably not for many years to come. The blind squirrel stumbled upon the nut.

Today's squirrels, in contrast, are dropped into equity-heavy target-date funds by automatic-default 401(k) programs, at least if they work for major companies. (The investment situation for those at smaller firms is less happy.) Will they be similarly fortunate? This article has assumed that that future real returns on equities will resemble those of the past. That was what I believed in 1988, and it turned out to be correct. Will 2019's novice investors find that same nut?

Pondering the Unknowable
The answers to those questions are beyond anybody's pay grade. We do not, and cannot, know if the soundest investment advice that the next generation can ever receive is what I would instruct my younger self: Buy stocks early, and buy them often. However, the subject bears discussion. As I have realized while thinking through my 30-year Morningstar anniversary, the level of stock market returns dominates all else. It is, as the saying goes, the elephant in the room.

In Friday's column, I will give the topic my best effort.


John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

John Rekenthaler has a position in the following securities mentioned above: NCTWX. Find out about Morningstar's editorial policies.