123 What’s the Real Rate of Return of the Stock Market

123 What’s the Real Rate of Return of the Stock Market?

Well the Dow was at 17,000, but this week certainly hasn’t been very generous to American equities. Ignoring that ugly truth for a minute, we wanted to take a minute to look at last week’s awesome new highs and discuss what it really means for the real return of the stock market.

17,581.9 Who Remembers This One?

Back in February of 2012, I published an article on the Insurance Pro Blog pointing out that in order for the Dow Jones—which had just reached 13,000—to have achieved an 8% annual rate of return since the fall in 2008 it needed to be at 17,581.9. So we’re close, right?

No, unfortunately time has an effect on these things and since two more years have ticked by out 8% annual return has pushed the level of the Dow up to 20,721.72. In fact, at 17,000 the Dow has only returned 4.49% per year since the height of the market in 2008. And it gets worse, if we wanted to be at Dave Ramsey levels, we need a Dow at 25,774.57.

Now, there are those who would suggest we need to give the market time. Time will smooth out these rough edges and make everything right with the world. But it’s been six years since we started the free fall that came about in 2008 and the annual growth rate from the Dow has been 4.49%. But, some might suggest, that’s the Dow, why don’t we talk about the S&P 500? So let’s do that.

The S&P 500

For the same period in 2008 to last week’s party inducing highs the S&P 500 boasts a 5.73% annual rate of return. Not terrible, but a far cry from the 8% of even 12% number we’ve seen brandied about by others. So six years and we’ve got 5.73%…yippee…

But again, the investment salespeople and former investment salespeople turned TV personalities will bemoan the short timeline. So let’s go back 10 years. It’s 4.93%. Of dear, it’s getting worse.

But surely if I go back 20 years I’ll get it right. I’ll be in double-digit territory and I’ll blow the doors off this thing.

…No it’s actually only 6.24% annual return over the last 20 years. I have to go all the way back to 30 years to get an 8% annual rate of return (notice still not 12%) for the S&P 500 and that’s a really long time to be 100% invested in stocks. And what if someone doesn’t have 30 years before retirement? And do we really think the next 30 years are going to mimic the last 30 years?

Let’s be Clear about something

I’m not telling people to not invest in the stock market. There are benefits to be had from the market, and there are investment strategies that outperform the markets. But to systematically think that investing in the market is the path to prosperity, and to believe the colorful brochures that overstate market returns further flashed about by investment “professionals” who couldn’t define compound annual growth rate—let alone calculate it—is a foolish move.

And 17,000 for the Dow—or 16,900 where it’s currently sitting—is good, but it’s not necessarily cause for celebration. The real rate of return of the stock market needs to be put in check and we all need to take a lot more time to determine if the returns are really that great relative to the risk exposure.

About the Author Brandon Roberts

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.

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