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my favorite charts, part 1

Why the stock market is better than your mattress

“Past Performance is Not Indicative of Future Results.” If you’ve spent any time at all dabbling in personal finance, you’ve most likely heard that phrase. And the scary thing is, it’s true. Even for a level-headed, consistent person like myself, it can be hard at times to maintain trust in the markets. (This is especially true at the time of this writing, as the S&P 500 is down 25% over the past 6 or so weeks due to the COVID-19 pandemic.) But when that small bit of doubt creeps in, I am reminded of the chart below.

It comes from Ben Carlson, a portfolio manager at Ritholtz Wealth Management LLC (@awealthofcs on Twitter). The chart shows the rolling 30-year annual returns for the S&P 500 dating back to 1926. What does this mean, exactly? Take the year 1926, for example. An investor who entered the market in 1926 and held their position for 30 years would expect an average annual return of ~10% during that time period. In practical terms, if they had invested $100 in 1926, that sum would have grown to over $1,700 by 1956.

Detractors might argue that this chart doesn’t account for inflation, and they’d be correct. But it’s important to note that the 30 year period from 1926 to 1956 was not all rosy. The stock market crash of 1929 and World War 2 are two major events that occurred in that time span, and yet the markets recovered well. Others might argue that 30 years is a long time to hold a position, and again they’d be correct. But saving for retirement is a long term endeavor, not something you should try to accomplish in ten years or less.

Looking at the graph as a whole, the lowest annual return was just south of 8%, occurring during the 30-year time period beginning around 1930. So, the worst case scenario over the last 90+ years is a roughly 8% annual return rate? Sign me up! There’s simply no other investment option out there that can produce those results.

Of course, as I mentioned in the first sentence, past performance is not indicative of future results. No one can guarantee that the graph’s findings will continue over the next 100 years. However, you should take solace in the fact that if the data doesn’t hold up in the next century and 30-year returns can’t keep up with inflation, society will have bigger fish to fry than retirement portfolio returns!

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