May 16, 2017 | by James Behr Jr & Christopher Paleologus
Amazon, Inc. had its initial public offering (IPO) 20 years ago this past Monday on May 15, 1997 and has grown to become arguably the most disruptive force in the retail and technology space today. The stock price has gained an astounding 36% compounded annually since its first day of trading. According to The Wall St. Journal, a “$10,000 investment in Amazon Inc. 20 years ago would be worth $4.9 million today.” It can be very easy as an investor to say they would have purchased Amazon stock at the IPO and held onto it knowing what they know about the stock performance today.
The chart below shows the remarkable growth of Amazon’s stock price from the IPO until today.
What most people forget is that Amazon has had a bumpy ride along the way. Many people also forget that Amazon shares lost 95% during the tech bubble burst of 2000.
It is very easy to look at the first chart and say that you would have stayed invested in Amazon for the long term, yet it would have been very difficult to watch a portfolio holding decline as much as Amazon did during the tech bubble of 2000. It would have been even more difficult to foresee just how disruptive Amazon would become when it was thought of as only an online bookstore and purchase more shares at the lows of the stock in 2001! Many critics on prominent television networks and in print had declared the online retailer dead. A Newsweek article quoted a story from the Washington Post from February 21, 2001 where the author said he “expects the Internet retailer to run out of money to adequately fund its operations later this year.” Nearly 12 years later, Amazon was still in business and its founder, Jeff Bezos, purchased the Washington Post.
The same can be said for investing in the overall market. The chart below from JP Morgan shows S&P 500 intra-year declines vs the annual return for that year since 1980.
Notice that in each year the S&P 500 on average experiences about a 14.2% decline. There have been two major negative events in the market with the tech bubble of 2000 and the Great Recession of 2008-2009, yet the S&P still had annual positive returns in 28 out of the 37 years!
Again, with hindsight, it is easy to say you would have stayed invested over this period of time yet even during an “average” year, it can be extremely difficult to stomach a 14% decline in your portfolio. To put this in perspective, a $1,000,000 portfolio would see a loss of $140,000!
This is where having protection using a covered call strategy and index-linked notes can help mitigate losses during inevitable market downturns. Nothing is fool-proof and there is no “magic-bullet” in investing but having a long-term plan along with downside protection or hedging strategies in your portfolio can help you keep emotions in check and weather these drops in the stock market. If you think your investments could benefit from professional money management or are interested in learning how these strategies can help you achieve your financial goals, please contact our office at (610) 825-3540 or email us at email@example.com.