On Capital Gains & Losses Part II

Last week we introduced the beginning of a series on what to do about capital losses. {You can see Part I here: http://lumencapital.blogspot.com/2009/06/on-capital-gains-losses-part-i.html }Today we continue by looking backward to see what's transpired. Hopefully we can illustrate the enormity of the capital losses that most investors must confront. We'll be using a monthly chart of the S&P 500 going back to the mid 1990's to illustrate these losses {double click to enlarge}.
Two pink trend lines extend across the chart. On one level they are simply a continuation of the trading range illustration we've repeatedly showed you since last fall. Notice though that this trading range extends backwards showing us that we have currently bottomed around the same level that we last touched in 2002-2003 and first breached in the late 1990s. This sets up a pretty easy illustration in terms of capital gains or losses.

If you purchased securities and have a holding date below the lower pink line then you currently have a long term capital gain on that investment. If you purchased securities that you still hold between the pink lines then you are likely break even to slightly ahead on your investments. Anything that you bought above the higher line and have held on to is a capital loss. To make these monthly losses easier to see, I've also highlighted them in yellow. Yellow periods indicate months where holders who purchased during that time will show losses. A cursory view shows this is many months.

This chart represents approximately 13 years of S&P monthly stock price movements. That equates to about 156 monthly bars. There are only 14 bars either fully underneath the lower line or partially underneath it. That represents less than 9% of months when long term investors could have bought securities in which they currently have gains. There are another 17 months in between these lines that can safely be said to be break even or slightly positive. That is about 11% of the possible months. This means that slightly more than 80% of investable months since 1997 are periods in which any purchases made and still held today have lost money.

That's simply the way it is. I don't care if I was managing your money, somebody else did if for you or you did it yourself. Anybody that has purchased securities in a portfolio and held on to them during most of this period has likely lost money. It has likely happened to you just as it has happened to sophisticated investors like Warren Buffett and to everybody else.

To look at this in years, if you bought securities in late 1997, 98, 99 or 2000 you likely lost money if you were a buy and hold investor. You likely lost money in 2000 through 2002 and are underwater for sure if you are still holding equities you bought in late 2003 until today. The fact of the matter is we are all likely dealing on our books with capital losses. How we deal with these losses going forward will likely determine how satisfied we become with our investment performance.

{Part III coming next week.}

*Long ETFs related to the S&P 500.