Typical Investment Returns
Investing can generate stratospheric wealth if done correctly. Typical investment returns for stocks, bonds and real estate should be considered. Different time frames used to derive average returns have a large impact on investment allure, especially for stocks and real estate. Averaged returns are deceptive because of volatility's negative effect, which is explained and illustrated in the last two sections.
Other People Are Reading
-
Stock Return Timeframes
-
The S&P500 can be used as a proxy for the entire stock market. It has increased by about 45 percent between March 23, 2009 and March 23, 2010. However, investing five years ago would have given almost zero yield today. Investing twenty years ago would have given about a 250-percent return. Rapid price increases, such as in the late '90s or March 2009 through March 2010, can boost investments to fantastic heights. Market crashes, such as the ones in 2000 through 2003 and Oct 2008 through March 2009 can wipe out over half of investment value shockingly fast. Interactive charts on Yahoo Finance were used to determine the stated percentages.
Bonds
-
Bond returns are usually smaller than stock yields. However, bonds have less downside risk than equities (stocks). The Bonds vs Equity Returns table clearly illustrates that bond yields are smaller, but are much more likely to be positive. Stocks gyrate from fantastic highs to painful lows; the most recent shown year (2008) saw stock value decrease almost 40 percent.
-
Real Estate
-
REIT.com was used to find average yields between 1972 and 2009. The results look bad. Average return is never above 1.10 percent. This may seem contradictory to the InvestorHome data, which states historical returns of 11.1 percent (good) between 1926 and 2006. The 11.1 percent return quote incorporates an 80-year investing time frame. People don't stay in the market that long.
Misleading Averages
-
Consider partial time frames, not just an overall average. Here's why: Averaged percentages are technically accurate, but imply more money than you actually get. Had you invested in a fund that tracks the S&P 500 (the government "C-fund", for instance) at the start of 2002, annual returns for the next three years would have been, in percent: -22.05, 28.54 and 10.82. Averaging gives 5.77 percent. On the surface, that would seem that every thousand dollars invested in 2002 would have compounded at an annual rate of 5.77 percent for three years. If so, each thousand would become 1183.28 dollars---about $1.18 returned for every dollar invested.
Misleading Averages Example
-
Let's see what happens year by year. From 2002 to 2003, the 22.05 percent decrease means that each thousand dollars becomes 779.50 dollars---equivalently, each dollar becomes 77.95 cents.
From 2003 to 2004, the 28.54 percent increase acts on the 779.5, NOT on the original thousand. We get 1001.97 dollars.
From 2004 to 2005, the 10.82 percent gain acts on the 1001.97 to give 1110.38 dollars. Over the three years, only $1.11 returned for every dollar invested.
A more accurate averaged compounded rate, back-calculated using the actual ending 1110.38 amount, is 3.55 percent, not 5.77. Volatility and percent losses eat away at returns more than might be expected.
-
References
Resources
- Photo Credit stock market analysis screenshot image by .shock from Fotolia.com
