Market Remarks

Counting On Average Market Returns

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%

 

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