Investment question. What % needed to reach 7% annual return now.

Ok, this has a potential to be in GD., but for now there is still a factual or mostly factual answer.

Hypothetically:
Let’s assume that the S&P 500 starts 2009 at approximately where it is right now.
Let’s also assume that for the last 10 years I have been putting away \$2000 in a fund that tracks with the S&P 500. Deposits made at the first business day of every year.

What kind of annual interest rate would I need to get in order to have a 7% average annual return on all deposits 10 years from now? That is, I’ve been making deposits, I keep making deposits, and want to retire in 10 years.

I ask because it seems oft quoted that in the “long-term”, the market averages a 7% return. Reports earlier in the week said that the DJIA was below where it started when Bush took office, so I am guessing that means the market average annual return for that time frame would be approaching 0%. I picked a 20 year time frame because while that may not technically be “long term”, it seems to me that many people do not start seriously investing in anything until they are in their 40’s.

Lastly, is it reasonable to expect a 7% average annual return from the years of 2000 to 2020? If you have the figures, how about a 7% from 1990 to 2020?

I guess I don’t understand the question.
In order to get 7% annual return you’d need a 7% annual interest rate.

I think he means, given the recent decline in the market, what kind of return would he need from now until 2010 to have achieved a 7% annual return for the period 2000-2010.

I understand the question. You can get a quick estimate using the annuity formula. If you earned a constant 7%, then you would have \$81991 after 20 years.

If you assume that after 10 years it has worked out such that all you have is the payments you made to that point (\$20000), then you would need to earn almost 24% over the next 10 years to end up with \$81991.

In reality it wouldn’t be this bad though, because you should still make a little money in a fluctuating market that ends up where it started due to dollar cost averaging. It’s simple to calculate the first 10 years with a spreadsheet if you have the data.

If we have a ‘given’ that from say, 2000 through 2009 that the average annual return for those years essentially comes out to 0% return; would I need to get an average annual return of 14% in years 2010 through 2020 to get a 20 year average annual return of 7% for all monies from 2000 through 2020? That 14% average annual return from 2010 through 2020 doesn’t seem quite right though, since in some years, monies invested would have been invested at times when the market is higher than now. So, it would have to make up for the declines.

Is it even a ‘given’ that the market would have an average annual return of near 0% if it stays about where it is now until the end of the year (using January 2001 or January 2000 as a base; your choice of starting year).

As I understand the claim, the market may lose value some years, gains value other years. “Long-term” (whatever that means) the gain is said to generally work out to an average annual return of 7%. I am asking that given the condition of the market now, and during the last 10 years, and/or during the last 20 years, what will the rate of return have to be to average out to 7% by 2020?

Has there ever been a time of 14% average annual return across a 10 year period?

Given your scenario of \$2000 invested in the S&P500 at the start of each year from 2000 - 2020: ignoring future dollar cost averaging effects and assuming the S&P500 will increase at a steady rate, you would need the index to grow at a steady rate of about 9.7% to wind up with an overall 7% annualized rate of return for the two decades. You’d end up with about \$96k on December 31st, 2020.

Didn’t look up with S&P500 index values for 1990 - 1999.

I think you have the answer I was looking for. The 20 years time frame would still -look- like a 7% average annual return across all 20 years, but those last 10 years would really have to be just kickin’.

So, it is unlikely, at best, for investments made during the first 10 years or so to make it to an average annual return of 7% by 2020.

Thanks!

Ok, it was bugging me so I grabbed the data from Yahoo and made a little spreadsheet. Bad news - if you started on Jan. 2, 1999, you would only have \$19080 after the first 10 years (ending today). So you really will need to average nearly 24% over the next 10 years to make your 7%.

No, because interest earned at the beginning of the 20 years is much more important than that at the end due to compounding. So you would need a lot more than 14% during the last 10 years.

The current price is well below what it was in Jan. 2000 or 2001, although it’s still well above what it was in Jan. 2003 (near the bottom of the 9/11 drop).

… Nevermind… I was using a compound formula for the price gains… :smack:

OOPS!!

I forgot to apply interest to the money from the first 10 years in my calculations above. The revised answer is in-line with Caldazar’s calculation - you would need about a 10% return for the final 10 years.

Disregard anything I’ve said that didn’t agree with this. And it is quite possible that the index will grow at that rate (let’s just hope it’s near the bottom now).

By the way Caldazar, I just used the annuity formula for the \$81991:

``````
FV = 2000*(1.07^20-1)/0.07

``````

Ah, okay. I think I was confusing myself as well. I forgot that the 7% quoted gain of the S&P500 is a compounded rate gain, not a straight per year rate gain.

Makes sense regarding our different values then, I was assuming 21 payments of \$2000 rather than 20.