By: Larry MacDonald
If you stay invested in stocks for 10 years, you’ll come out ahead. That’s what an Ativa.com calculator shows for every 10-year period from 1934 to 2007, using end-of-month values of the S&P 500 Total Return Index (768 observations). For those rolling 10-year periods, you would have averaged an annual return as high as 21.3% or as low as 0.4%, with a tendency toward 12.8%.
If you had invested for periods longer than 10 years, the average annual returns move in closer to the mean. For example, for holding periods of 25 years (588 observations), annual returns were as high as 17.3% and as low as 7.3%, with a tendency to 12.2%.
If you had invested for periods shorter than 10 years, your chances of losing money are material. Take rolling 12-month periods. There were 670 of them from 1934 to 2007, and 30% incurred losses. You could have earned as much as 83% or lost as much as -49.5%, with a tendency to 12.8%.
These online calculators can be useful. Note, however, the Ativa.com calculator does not go back to the 1920s. If it had, it’s possible some of the 10- and 15-year periods may have shown some negative returns.
3 Responses to “ Stocks for the long run ”
This is a dubious arguement.
Have you heard of ’survival bias’? Do these calculators let you pick stocks that died? If not, then their results are significantly skewed to look better than they are.
For those who haven’t heard of ’survival bias’, it’s a pretty obvious thing once you think about it. There’s a good book called ‘Fooled by Randomness’ that mentions it and other common flaws in analysis techniques.
By Joseph G on Feb 17, 2009
JG
See also my Feb. 18 post on survival bias in relation to other countries.
LM
By Larry MacDonald on Feb 18, 2009