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Thursday, December 1, 2022


The Total Return Roller Coaster

Courtesy of Doug Short.

Note from dshort: In response to a request, I’ve updated this commentary based on data through the 2011 close.

Here’s an interesting set of charts that will especially resonate with those of us who follow economic and market cycles.

Imagine that ten years ago you invested $10,000 in the S&P 500. How much would it be worth today, with dividends reinvested but adjusted for inflation?

Brace yourself: The purchasing power of your investment has grown to $10,298, a rather disappointing annualized real return of 0.29%.



Had I posed the same question in March 2009, the answer would have been a depressing $5,521. The -5.93% real return would have cut the purchasing power of your initial investment nearly in half.

The Fun Runs of the Roller Coaster

Now let’s imagine that we time-travel back to September 2000 and pose the same question. Your ten-year inflation-adjusted gain would have been $49,683 — up 396% for an annualized real return of 16.13%. As the chart illustrates, investment performance with a 10-year timeline has been a real roller coaster as far back as we have data.

If we extend our investment horizon to 20 years, the roller coaster is less volatile with higher lows and lower highs.



The volatility decreases further with a 30-year timeline. But even for that three-decade investment, the annualized returns since the 1901 have ranged from slightly less than 2% to over 11%.



As these charts illustrate, and as many households have discovered over the past few years, investing in equities carries risk. Households approaching retirement should understand this risk and make rational decisions about diversification. They should also consider fixed income alternatives for that part of the nest egg that will pay non-discretionary expenses not covered by Social Security and pensions.

You can play around with hypothetical returns — both nominal and real — over various time frames with this nifty The S&P 500 Calculator at the Political Calculations website. Here’s another version that allows you to include a fixed monthly additional contribution.

See also the report Estimating Future Returns, by Adam Butler and Mike Philbrick, which takes a close look at real 15-year total returns.





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