First off, I’m certainly not here to defend Social Insecurity as an “investment plan”.
Now to my point - I’ve heard this “in the long run, the stock market averages 10% a year (Dave Ramsey even says 12%)” since, well...forever. I’d never really questioned the figures - I just took them as fact.
The only problem is, looking at this historical chart of the Dow http://finance.yahoo.com/echarts?s=^DJI#symbol=^DJI;range=my
and plugging some numbers in Excel, it appears that this statement is patently false.
As an example, if you invested in Jan, 1950, the Dow was at 235. In January 1975, the Dow was at 768. That’s not 10% annually. It ain’t even close. From what I can see, the ONLY time the market has performed that well over a stretch was from ‘75-2000.
Am I missing something, or are the financial advisors who’ve been pushing this line for the last 20+ years bold-faced liars?
I am not sure who those people are but I think a more true figure would be around 7%. I think that number will even bear out in the time frame you provided.
You’re right. The returns were higher in the later years. I have no idea what rate of return they were claiming in the 50s and 60s. I was too young to care, but my guess is, they were probably using a lower number. Mortgage interest rates were much lower back then too. I was in the service in the latter part of the 60’s and I invested in savings bonds. I think the rate of return was something like 2.5%.
By the way, if the vertical scale on the chart you linked were equally graduated, your chart would resemble a hockey stick. The line from about 1985 onward would be almost straight up and it would be about ten times higher than it is.
In addition, you can find endpoints that show a return only equal to inflation or a return at high as 15%, depending on specific dates chosen. 1929 to 1982 will look lousy, 1932 to 2000 will look great. Fair measures have to measure from peak to peak or trough to trough, or better still, properly reflect not a one time investment at a single price, but gradual investment that averages out the prices paid over whole swings.
The stock market is volatile, however. And that does matter, it is not just a footnote. 100% stock means a pretty serious gamble on the holding period. That is why market practice for nearly a century has instead been to hold both stocks and bonds, in equal proportions or 60-40 to overweight stock a bit for its higher long run returns. The combination reduces the volatility enourmously, because bonds pay throughout, and rebalancing buys stock low and sells it high.
It is easier to walk on two legs than to hop along on one...
The Dow is only a small piece of the entire U.S. stock market.