A Royal Affair

April 29th, 2011 marked the wedding date of Great Britain’s Prince William to Kate Middleton. It’s not every day that we get to watch the marriage of a “real life princess.” In fact, the most memorable royal wedding prior to this one took place almost thirty years ago, when Prince William’s parents, Prince Charles and Lady Diana, had their own wedding, on July 29, 1981.

That July marked a challenging time, from an economic point of view.  The United States had just entered a severe recession, brought about almost purposefully by the Federal Reserve Bank in order to deal with the serious inflation problem of the time. Interest rates were around 20%, and the unemployment rate was somewhere around 7.5% for most of the year, well on its way to its peak of 10.8% by the end of 1982.

 A first-class stamp cost $0.18, a gallon of milk cost $2.22, and a gallon of gas cost $1.38. The S&P 500 Index, a broad measure of  large US stocks, closed the month of July at 129.10.

 Those prices and stock values now seem remarkably quaint. Of course, we need to adjust for inflation, which averages about 3% a year between July, 1981 and April, 2011. In inflation-adjusted terms, a 1981 stamp would cost about $0.44, a gallon of milk would cost $5.39 and a gallon of gas would have cost $3.35. In current dollars, the S&P 500 close in July of 1981 was the equivalent of 329.47.

 Compare those items to their current prices: a first-class stamp costs…$0.44. A gallon milk now actually costs less, at about $2.99. Gas is certainly higher, with the national average hovering around the $3.90/gallon mark.

 But what about the stock market? On March 31, 2011, the S&P 500 closed at 1325.83. Assuming reinvested dividends, $1000 invested in the S&P 500 Index at the end of July, 1981 would have turned into $22,685 by April, 2011 for a cumulative return of 2169%. Adjusted for inflation, that $1000 investment would have grown to $9162, for a “real” total return of just over 816%.

 Investors, still reeling from the difficult investment decade of the 1970s, could have opted to invest in bonds instead. Over that same time frame, a $1000 investment in the Barclay’s Aggregate Bond Index would have turned into $13,018, or $5258 net of inflation for a total “real” return of 426%.  That’s not bad, though it’s much lower than stock returns. Additionally, the returns would have been even lower if we considered the impact of taxes on the net return, due to the preferential capital gains tax rates enjoyed by stocks.

 This certainly doesn’t mean that Royal Weddings portend long-term bull markets in stocks. But the long time span between William and Kate’s wedding and Charles and Diana’s is pretty close to that of a 65-year old retiree who might live until age 95. That retiree is going to need something in their portfolio to help deal with the increase in the prices of stamps, gas and just about everything else we buy. Net of taxes and inflation, stocks still present the best long-term option for most investors.

About Ben Birken

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