In 1980, the average price for a home sold in the US was $73,600. By the 4th quarter of 2023, that amount had risen to $492,300. While some may associate this rise in value as appreciation in housing, calculated another way, this means that the equivalent dollar value during this 43-year stretch has declined by slightly more than 85%.

 

Consider for a moment the number of companies involved in selling products to build a home. Everything from lumber to plumbing parts, the businesses involved to supply these materials number into the thousands. The cost of a home has increased by more than 568% due to the increase in all the parts and materials associated within the home, not to mention the increased cost of labor or general expense of running a business.

 

During times of increased market volatility or uncertainty, I always find it helpful to remind us all just why it is we invest money into companies that participate in the selling of goods and services that help supply the economic development of our great nation. If out of fear or emotion we decide to park our cash in the bank or under the proverbial mattress, with certainty, we’re locking in the general erosion of this purchasing power through the silent capital killer called inflation.

 

To close 1980, the S&P 500 finished at a price of 118.71. At the end of March, this year, the S&P closed at 5,254.35. To save you the time, this represents a staggering 4,326% total return. Taking one step further, I happened to find a very handy calculator HERE that shows this return if you reinvest the dividends along the way. Would you be surprised to learn that this cumulative return was 11,001.69%? You may think this is too hard to believe, however it represents an annualized return of 11.51%. Now, just for fun, let’s say you happened to skip the purchase of the home in 1980 and park those funds into an S&P 500 index fund. Would you rather have a home worth $492,300 in 2024 or an account balance of $2,850,515.32?  Sound too good to be true? I have the great privilege of working with lifelong investors who have done this and, in many instances, they continued to buy along the way thus having a balance much greater.

 

“Oh but Quint, the Taxes…..” Let’s talk about that for a moment. Let’s say on average you have a 2% dividend on a starting balance of approximately $73,600 or the equivalent value of the home purchase in 1980. This means that in 1981 you would receive a 1099 for approximately $1,472. According to the IRS, the avg. effective tax rate in the US in 1981 was 16%, which means you owed approximately $235.52.

 

If you had a house at that time, do you think your property tax on this home would be more than $235.52?  Well, this equals approximately .32% so I think the easy answer is yes. In fact, property taxes, maintenance, insurance and the like would far outweigh the income tax liability on a 2% S&P annual dividend.

 

On the other hand, what happens when you go to sell the S&P 500 after the time period in question? Let’s say you’re not working with an advisor who has an in-house CPA, CFP and understands intricate tax loss harvesting, income distribution strategies and the like…I digress, but rather at the end of March 2024, you just decide to sell it all and move on. Well, in simple terms, albeit not as simple as you would expect since along the way your basis is increased due to the dividend reinvestment, let’s say you realize a capital gain of slightly more than $2.7M. In the state of Kentucky, you would owe approximately 4.5% in state income tax with another 20% in Federal tax on the gain. Let’s just round up and say that you owe a whopping 25% or $675,000 to Uncle Sam. This brings your final net after tax balance to just a tad more than $2MM.

 

The house on the other hand sells for $492,300, losing an average of 5% in commission, netting you $467,685. Since you paid $73,600 and maybe can justify another $100,000 in cost basis adjustments over the years, you’re able to comfortably calculate a basis of $173,600 for a gain of $294,085. The government gives you the first $250,000 free of tax, which means you only owe the approximate 25% on the $44,085 for a liability of $11,021.25. In short, a much smaller check paid to the IRS.

 

In the house scenario, you walk away with a cool $456,663.75; however, after selling down your S&P 500 fund, you should net approximately $2,000,000. In both cases, you’re still homeless…..

 

The exercise above is not voodoo math or some wild story of discovering Amazon or Google before others. It is NOT about selling stocks at the absolute peak before a great crash or even the heroic and steadfast investor stepping in when so many others were panicking and losing their mind. No, the above story is simply a look at historic returns over the last 44 years within the S&P 500 or one of the most basic index investments out there. The time in question includes the 1987 crash, the early 90’s real estate implosion, the dot-com boom and bust, 9/11, the Great Financial Crisis, COVID, and most recently the Ukraine Russian war.

 

Furthermore, it is not a question of, “either or” since I’m not sure I have ever met anyone who is struggling to decide between shelter and an S&P 500 fund, however it serves as a great reminder as to just why we invest.

 

We invest because over time one thing has proven true within any great nation going back hundreds and hundreds of years. Inevitably, our purchasing power will decline as a society evolves and the currency in question is devalued. This has transpired going as far back as the Roman Empire and it is as true today as it was in the 1970s. Despite the ebbs and flows and reduction of CPI, it will continue to be the case going far into the future.

 

Our job as consumers when we make income or create wealth is to ensure we maintain this purchasing power in the face of devaluation. There are a variety of asset classes to invest in for the purpose of this. Some of these asset classes are safe and secure such as money market or cash, while others are a bit more volatile such as commodities like Gold or even Bonds. There is one major asset class that is directly tied to the inflationary and devaluation backdrop of increasing prices along the way in order to not only keep up with the economic evolution but pass these profits onto shareholders. You guessed it, it’s stocks.

 

 

One drawback; every minute of every day, you must observe the emotional rollercoaster of price discovery. Sometimes investors feel great and bid stocks higher into unbelievable levels almost too good to be true. On other days, investors are sour and scared selling stocks at prices that are far disconnected from the underlying business. Somewhere in between lies the real value of the going concern. Regardless of what the market may say on any given day, it is our job to remember as astute long-term investors, that true value lies in the long-term appreciation and compounding of the underlying business and just when others are thinking things may be different this time, history tells us it is just more of the same.

 

Don’t ever forget that we invest to protect our purchasing power into the future. With this knowledge, one should never become too excitable during times of plenty or too emotional during times of uncertainty but rather slow and steady despite the ups and downs along the way.

 

Until Next Time

~ Quint

 

Disclosures

Joule Financial, LLC is registered as an investment adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability. A copy of Joule’s current written disclosure brochure filed with the SEC which discusses among other things, Joule’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov

This does not constitute an offer or solicitation. This information should not be considered investment advice. Opinions expressed reflect the judgment of the author and are current opinions as of the date appearing in this material only. While every effort has been made to verify the information contained herein, we make no representations as to its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Past performance does not predict future results. Content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. All investing involves risk, including the loss of some or all of your investment.

Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.

Hyperlinks in this letter are provided as a convenience, and we disclaim any responsibility for information, services or products found on websites linked hereto.