RUA, Stocks and the Rate of Return

The DOW closed over 10,000 yesterday, October 14, 2009, rising above the 10,000 point level for the first time since October 8, 2008.  That puts the DOW up over 53% from its lows earlier this year and the S&P 500 up 60% and the NASD up 70%. WOW what rates of return – and those are computed without adding dividends into the return.

What we at the Ownership Society Institute (OSI) want the reader to recognize is the rate of return one can earn by investing in stocks.  If you had invested at the market’s lows in funds that mirrored these indexes your investments would have increased 53%, 60% or 70% this year.  When compared to the 1½% rate paid by banks these returns clearly illustrate why investments in stock can be so attractive as an investment vehicle. When averaged over a working life of 40 years the returns compound into serious wealth.

On our website we report in the “tables” section the average rate of return for 40-year investment cycles in the S&P 500 stock index from 1871 through 2006 starting with the 40 year period 1871 through 1911.  The average return turned out to be 9.8% including the 13-year period of the Great Depression. For the last 25 years of that study the rate of return was 12.5%.  In computing the anticipated rate of return on our Rise Up America (RUA) plan we used a 10% ROI.

To illustrate what a larger rate of return can do in creating a nest egg a $60,000 a year truck driver would accumulate a $4.6 million nest egg in 40 years at a 10% whereas the actual rate for the 40 years ended in 1999 for the S&P 500 was 17.4% and created a $53 million dollar nest egg. We at OSI believe that the latter rate of return would be more likely under the RUA plan due to the large infusion of new capital into the economy and the economic activity it would trigger..

One of the two major components of RUA plan is the investment of the annual Federal payroll taxes into the stock market in a privatized plan wherein the taxpayer ends up with a “USA” , a Universal Savings account to accumulate funds for his retirement.  As that market has been starved for capital due to the lack of savings and the build up of unfunded projects for the last 8 years we anticipate the rate of return upon the enactment of RUA legislation to jump to over 20% for several years.

As Social Security has no provision for a nest egg, no matter what the rate of return would be there is no comparison between Social Security and the RUA plan. Therefore there is no conceivable argument or debate as to the desirability or viability of the RUA plan.  In addition the RUA plan calls for the reduction in the size of the government (probably by half the national budget), the largest tax cut in history (no payroll taxes) and the liquidation of all but $7 trillion of the $72 trillion of national funded and unfunded debt.

Upon hearing the basic elements in the plan there are those who say the stock market is risky and can fall in value and they would never invest in the stock market.  They fail to understand that even in the Great Depression the S&P 500 only fell 60% and later recovered. It never fell to zero.  Further the reasoning is incomplete as right now they have no money to invest – the government confiscates and keeps its all. Under RUA they retain the 15.3% of their lifetime earnings and have a chance to achieve the American Dream of financial independence.  The dream today is wishful thinking – RUA would make it a reality.