Question of the Day: Are Stocks A Risky Long-Term Investment?
Investment gurus often say that “you should invest for the long-term.” Agree or disagree with that statement based on the data you see in this chart about long-term stock market returns.
Here are a few points to highlight:
- There has been no 15 year period since 1871 when the stock market’s return has been negative. It did come close though with the lowest annual return over a 15 year interval being 0.2%. If your time horizon is fifteen years or longer, history tells us your probability of loss is quite small. If you incorporate inflation, however, then your probability of losing purchasing power would be higher.
- Even over 5 or 10 year periods, the probability of loss is quite low, with 11.5% (16/139) of five year intervals having a negative return and 3% of ten year intervals (4/134) having a negative return.
- The WORST stock market return for a 30 year period was 4.1% per year. With the power of compounding, even in the worst 30 year period, you could have turned $1,000 to over $3,300. Of course, if you earned the median 30 year return of 9.6%, that same $1,000 would be worth $15,643.
- The longer your time horizon, the lower your probability of loss. What’s interesting is that as you move out to longer intervals, your median return declines (from 9.5% for five years to 8.6% over 10 years to 8.4% over 15 years to 8.2% for 20 years) and then increases between 20 and 30 year intervals.
Ask your students what assumptions underpin this analysis:
- Historical data has some significance when thinking about the future (see reversion to the mean which stock market analysts often cite to explain trends in returns)
- As an investor, you will have the fortitude to remain invested even in the darkest days of a bear market. Research suggests that investors are often their own worst enemies.
- Will investors be satisfied just earning the market return (this chart is based on the performance of the S&P500)?
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.