Doug Short

About the Author Doug Short

Doug Short is first-wave boomer with a lifelong interest in markets and the economy. His professional career had been a satisfying split between academia (English Professor at North Carolina State University) and Information technology (IBM and GSK). Doug retired in 2006 to devote himself full-time to his dshort.com financial website. The domain has now been acquired by Advisor Perspectives, and Doug has been appointed the Vice President of Research. Doug is especially interested in the economy, long-term market trends and behavioral finance.

Sizing Up the Total Return Roller Coaster: Assessing Your Investments

By Doug Short

Note: We’ve updated the charts below based on monthly data through the Friday close.

Here’s an interesting set of charts that will especially resonate with those of us who follow economic and market cycles.

Imagine that five years ago you invested $10,000 in the S&P 500. How much would it be worth today, with dividends reinvested but adjusted for inflation?

The purchasing power of your investment has increased to $19,550 for an annualized real return of 13.48%.

Had we posed the same question in March 2009, the answer would have been a depressing $5,521. The -5.93% real return would have cut the purchasing power of your initial investment nearly in half.

Fun Runs of the Roller Coaster

Let’s increase the time frame to 10 years. The annualized return is considerably smaller. As of the end of last month, your $10K invested 10 years ago has grown to about $16.65K adjusted for inflation, an annualized real return of 5.11%.

Interestingly enough, the 15-year time frame is less profitable. Your one-and-a-half decade investment of $10K has grown to about $19.68K adjusted for inflation for a more modest annualized real return of 4.52%.

If we extend our investment horizon to 20 years, the roller coaster is less volatile with higher lows and lower highs.

The volatility decreases further with a 30-year timeline. But even for that three-decade investment, the annualized returns since 1901 have ranged from less than 2% to over 11%.

As these charts illustrate, and as many households have discovered during the 21st century so far, investing in equities carries substantial risk. Households approaching retirement should understand this risk and make rational decisions about diversification. In the past, we’ve suggested that they should also consider fixed income alternatives for that part of the nest egg that will pay non-discretionary expenses not covered by Social Security and pensions. Unfortunately, this traditional wisdom has been less helpful in recent years owing to the Fed Zero Interest Rate Policy (ZIRP) and various stimulus strategies, which have collectively shrunk interest rates. With the end of ZIRP last December and the second Fed rate hike now in effect, it will be particularly interesting to see how this slow-motion roller coaster plays out in the years ahead.