Everyone says stocks are the best way to go with your money in the long run, but after seeing a bunch of funds report something like 18% gains since their inception in the nineteen seventies and eighties(!) I’m starting to wonder just how true this actually is. So how far back in history do you have to go before investing in stocks would give you a current value better than inflation? If someone invested a million bucks in the stock market in 1985, and their returns matched the market average, would they currently have something worth more than inflation+principal?
You say that like 18% returns are a bad thing.
The S&P 500 index has an average return (including dividends) of around 9% since its inception way back in the dark ages (1923.) If you were to buy a million bucks worth of S&P500 index shares in 1985, you’d have roughly $10.8 million today.
ETA: According to this inflation calculator, a million 1985 bucks would cost $1,903,042.62 in 2007.
Okay so 1985 is far enough back. So what’s the threshold? If you put that same million bucks in stocks in 1998, would you still be beating inflation?
Yeah, you’d still be beating it. US inflation rates are typically in the low single digits. The last time it got really high was in the late 1970s/early 1980s, when it got above 10% for a while, but that didn’t last too long.
There are years when the market takes a dive; for example, in 2008 the S&P 500 return was something like -35%, and inflation is always positive. But I would venture a guess that a well-diversified stock portfolio will beat inflation over, say, any ten-year time period.
Correct, but don’t forget that *deflation *is entirely possible. That’s why I Bonds, which are “inflation adjusted,” are currently paying a princely 0.00%: the “inflation” rate over the latest six-month period they use was something like -2.7%.
the problem with this idea is that it can always be gamed. If you choose the period from a peak to a valley, the stock market does poorly compared to inflation. Shift your window a year or so and it does well. I am not a stock market aware person, but it seems to me that since you can’t pick when you start (no one can decide to start investing last year), you have to invest in the stock market in a way that allows you to pick the time you get out. If you can’t do that, the odds of losing money at least relative to inflation go up a lot. You still might win compared to inflation, but those valleys (and peaks) will always be with us.
Actually, you can invest (and withdaw) money continually over a stretch of time (eg 5 years), and avoid the “peak-to-trought” vs “trought-to-peak” dilemma. Sort of a risk-averager.
This decade the S&P seemingly didn’t get anywhere. Now it’s where it was in '97, and the peak in '07 was the same as the one in '00. But that’s really because the market blew it load in the second half of the 90s. All the technological mind-blowing productivity didn’t arrive as quickly as they (supposedly) thought it would, but it did trickle in over the course of the following decade.
In the long-term, the stock market will beat out inflation by at least the GDP growth.
But, the question is still interesting. In the 19th century there were much harsher cycles and general instability. Everything was more wild. What were the returns in that period?
Go here: http://www.google.com/finance?q=INDEXSP:.INX
Turn on settings>logarithmic display.
Set zoom to max (since 1970)
From 1980 to 2007, there is a near-perfect line. Steady as Moore’s law. (Minus the '96-'02 hump.)