I’ve heard people say that, over time, you are virtually guaranteed to make money in the stock market as long as you’re well diversified. I think it was Clark Howard who said that, if you look at any 10-year interval (e.g. 1958 to 1968), money invested in the stock market at the beginning of the interval (1958) would increase in value an average of 7% by the end of the interval (1968).
I tried finding some data and charts that supported this figure, but couldn’t find anything.
So based on the historical performance of the stock market, how long would I have to keep my money in the market to make, for example, an 8% return? Or a 9% return? Just looking for some data that addresses this.
I do not think there is any way to answer this because it depends on the index you choose and then you would have to be deversified in exactly the same way. Investing any other way might mean losing money or making more.
Just look at a chart describing the S&P500 over time.
That’s the closest proxy for “the market as a whole” that you’re going to find without making it yourself.
I think I see what he’s getting at and it’s an interesting question. Suppose you took the S&P500 and wanted to know, historically, if you invested $X on the worst day to invest the max time you would have had to have waited to achieve an annual return of y% would have been Z years. It would be interesting to see for a y of 0 >= to 10.
For instance, suppose I have money to invest today. I really want to get a 6% annual return on this money. Historically speaking (and there are certainly no guarantees going forward), what’s the max time I would have had to have left the money in to have gotten a 6% return. You would assume the worst case scenario would be where you invest one day and the market tanks. How many years would I have had to wait to get my money back to an amount equivalent to a 6% annual return?
I took to long to edit that post, so let’s try again…
It’s a tricky question because of the random ups and downs of any day on the market. This chart shows the Dow Jones Industrial Average and the S&P 500. Note that if you invested in the Dow just before the 1929 crash it would have taken until 1954 just to get your money back – no profit. Since then it’s been an upward trend, but not that for both indices, the 1965-1985 period is more or less flat. In any random 10-year period during that time, you could have made some money, broken even or perhaps lost some. It’s only since 1985 that the 10-year profit seems to be generally true on for any given date, but the 2000+ timeline isn’t done yet.
I don’t think that includes dividends. When including dividends I have heard (and I have neither the software nor the data to actually prove this) that someone who invested all their money in 1929 (very unlikely) still would have broke even in about 1936.
So the indexes don’t include dividends? I was unaware of this. I thought if you invested and the index rises, say, 15% over 5 years and then you sell up, you would have 15% more money. But if the average dividend yield is say 2%, then I would make (approximately) another 10%?
Most indexes, including the S&P 500, include dividends that are re-invested. Thus, the return shown is the “total shareholder return”. I’m not sure about the Dow, which has other more glaring weaknesses anyway.
Also, when talking about stocks “making money”, you should establish a baseline. To me, a $50 stock that falls and then returns to $50 in 10 years is actually a major loss. You could have invested the money “risk-free” in US Treasuries and made much more than that. At the minimum, the rate of inflation over the time period should be your minimum baseline. Thus, with an average 2% rate of inflation, you’ve only made money if the stock is at least $60.95 in 10 years ($50 * (1 + .02)^10).
Forgot my main point: there are no guarantees with stock. Let’s say that you are 35 years old and want to retire at 65. You decide to invest your life savings of $1,000 in the S&P 500 or MSCI ACWI index, thinking that you’re pretty much guaranteed that these indexes will be higher 30 years from now. At the very least, you would expect that in 30 years that the index would be able to give you enough to cover inflation at 2% per year. So if the S&P is at 1000 today, you would expect it to be at least $1,811 in 30 years: ($1000 * (1 +.02)^30).
And since this is “guaranteed”, you figure that this 1,811 price could be insured very cheaply. So you decide to buy a “put option” that will give you $1,811 if the market didn’t live up to its guarantee, just in case. How much do you suppose that this insurance would cost you? Based on my calculation, this insurance would cost you at least $400, or 40% of your investment.
You don’t need to sort through reams of data to answer this one. OVER THE PAST 10 YEARS, THE U.S. STOCK MARKET HAS RETURNED ~0% (-3% if you adjust for inflation).
There have been NUMEROUS 10+ year periods where U.S. stock market investors lost money on an inflation-adjusted basis (1905-1915, 1929-1941, 1966-1982, 1998-2008). If you include foreign stock markets, you will find 40-year periods where investors lost money.
I posted this on another website and came out with this calculator that appears to be what the OP wanted. Note that it does some modeling so it isn’t accurate for small holding periods. But that’s all detailed in a link from this site:
I pulled out my monthly S&P500 historical data. The following holding period data are for the time period 1/2/1958 - 1/2/2008*. It compares the adjusted index values on the first trading day of each calendar month with the index values 10, 20, 30, or 40 years later. All return percentages are annualized values.
10-year holding period,481 periods
<0%: 33 periods
0%-4%: 87 periods
4%-7%: 90 periods
7%-10%: 92 periods
>10%: 179 periods
20-year holding period,361 periods
<0%: 0 periods
0%-4%: 70 periods
4%-7%: 95 periods
7%-10%: 108 periods
>10%: 88 periods
30-year holding period,241 periods
<0%: 0 periods
0%-4%: 0 periods
4%-7%: 105 periods
7%-10%: 129 periods
>10%: 7 periods
40-year holding period,121 periods
<0%: 0 periods
0%-4%: 0 periods
4%-7%: 44 periods
7%-10%: 77 periods
>10%: 0 periods
That’s real interesting Caldazar. 33 out of 481 (~7%) of the ten year periods have had negative returns (and that doesn’t even include inflation). Even a decade isn’t long enough in some cases. And according to the site I linked to above that includes data from 1871 indicates that a ten year period has had a negative 5.6% return. I wish it would tell me what year/month combo that was.
Are you sure about this? Wikipedia seems to indicate otherwise:
Quote:
In equity market, the popular quoted indices, for example S&P 500, are usually price level indices. See Stock market index. The total return index is the price level index plus the dividend reinvested. An example would be the German blue chip index DAX.
You’re right. In practice, I only work with the “total return calculation” of the S&P index, which includes indexed dividends. I didn’t realize that index itself did not include them. This site provides a good explanation: http://www.cftech.com/BrainBank/FINANCE/SandPIndexCalc.html