You often hear that stock investing is a sure thing over the “long run”. But as this chart from the NY Times and Crestmont Research shows, there is still a lot of luck involved. Your actual returns depend a lot upon when you start, and also when you finally withdraw. The matrix includes annualized returns for the S&P 500 for every starting year and every ending year since 1920, adjusted for inflation. (Click to enlarge.)
After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.
“Market returns are more volatile than most people realize,” Mr. Easterling said, “even over periods as long as 20 years.”
There’s a lot of information contained in this chart. Some observations:
- As your holding period lengthens, the returns converge towards the median of about 4% above inflation. Anything higher than that is very rare.
- The “long run” may be a lot longer than most people think. It can take 40+ years to get to that 4% real return, not just 15 or 20. Now, if you’re in your 20s or 30s, you probably will have a holding time of 40+ years for the money you’re investing now.
- Visually, investing from about 2000 onwards looks at least so far somewhat like investing from about 1970 onwards. (Both pockets of red in the early years.) Not the most exciting prospects. However, even if you start out strong, over the long run the returns also drift back towards the long-term median. It’s the money that you invest right before retirement that can be the most at risk.