In his excellent book, Don’t Count on It!, John C. Bogle, the founder of Vanguard Group of Mutual Funds, highlights the fundamental equation that the ‘net returns’ to Investors equals the gross returns on the assets minus the cost of operating the financial system. This means that beating the market is very difficult once you consider the fees and commissions that you pay to your fund manager. The manager has to beat the market substantially to provide the average market return to his or her clients.

We will write more about his book and his phenomenal investment philosophy but for now lets take a closer look at the average market returns?

Since 1900, the Dow Jones Industrial Average index has been up 25,672%, which amounts to 5.0% annualized return over the past 114 years. However, people do not normally live those many years nor do they keep their money invested for that long. So let’s break down the investment horizon to more manageable periods and find out the story.

Following table presents the average return for Dow for different period-lengths. It gives the rolling average return for the period based upon the end of month price. It also computes how much a $,000 would have turned out to be. The last column tells us the percent of times the return was negative – such as during most of 2009, the 5-year return was negative.

(Note: this analysis does not include dividends.)

Dow Jones Industrials since 1900
Period	Total Return	Annualized Return	$10K Investment	% of Time Underwater
5-year	44.8%	7.7%	$14,484	21.7%
10-year	83.6%	6.3%	$18,357	16.9%
20-year	248.0%	6.4%	$34,803	5.3%
30-year	461.9%	5.9%	$56,193	1.0%
40-year	747.3%	5.5%	$84,724	0.0%

What we see is that for shorter time horizon the annualized return is higher but so is the risk of negative return. Over a normal life span – which amounts to 30-40 years of investment time-period for someone who retires at 65 years – the average market return is almost always positive, though at a sedate 5.5% annualized rate.

The picture appears to be more convincing if we consider recent global environment – i.e. beginning 1970.

Dow Jones Industrials since 1970
Period	Total Return	Annualized Return	$10K Investment	% of Time Underwater
5-year	60.6%	9.9%	$16,063	14.4%
10-year	134.8%	8.9%	$23,482	8.1%
20-year	528.4%	9.6%	$62,841	0.0%
30-year	1151.2%	8.8%	$125,120	0.0%
40-year	1472.9%	7.1%	$157,292	0.0%

The broader market S&P 500 index also paints a similar picture.

S&P 500 since 1950
Period	Total Return	Annualized Return	$10K Investment	% of Time Underwater
5-year	57.3%	9.5%	$15,726	14.6%
10-year	113.6%	7.9%	$21,362	8.8%
20-year	351.0%	7.8%	$45,096	0.0%
30-year	775.0%	7.5%	$87,501	0.0%
40-year	1513.7%	7.2%	$161,374	0.0%

 

S&P 500 since 1970
Period	Total Return	Annualized Return	$10K Investment	% of Time Underwater
5-year	59.4%	9.8%	$15,944	16.3%
10-year	131.5%	8.8%	$23,154	6.7%
20-year	494.2%	9.3%	$59,421	0.0%
30-year	1082.0%	8.6%	$118,201	0.0%
40-year	1435.2%	7.1%	$153,516	0.0%