That’s a very selective term history; the exact bottom of the SP500 from Covid fear was March 20 2020, vs todays March 18th. Unless you put in everything on March 18th this is highly misleading. The true comparison would be your annualized dollar weighted average return (but for Schwab at least this isn’t easily calculatable, as saving is counted as increasing portfolio weight, and buying increases the base investment, but without a proportional change in ‘Total gain’).
Since 2000 the average annual return of the SP-500 is 5.9%(6.1% for VTI since inception) and a reasonable approximation of what would be earned going forward.
No, it’s lower than the normal “8%” you hear because I’m not averaging across time.
[+10%, + 1%, +9%, +20%, 15%] = 9% if you average the percentages, but this represents putting in $100 at the start of each year and selling any excess gains at year end. The way people invest of putting in $100 once and letting it compound* gives
*Actually people do even worse then this, particularly for hedge funds: individuals put money into hedge funds that recently outperformed but go on to reverse to the mean and underperform. So while the average annual returns are +30% −6% = 12% annualized, pretty good across time, but if you did 30% managing 100M and −6% on 1B then the dollar returns are net negative.
Picking a Schelling point is hard. Since the post focused on very recent results, I thought that a one year time horizon was an obvious line. Vanguard does note that the performance numbers I quoted are time weighted averages.
You are of course correct that over the long run you should expect closer to 5-8% returns from the stock market at large.
That’s a very selective term history; the exact bottom of the SP500 from Covid fear was March 20 2020, vs todays March 18th. Unless you put in everything on March 18th this is highly misleading. The true comparison would be your annualized dollar weighted average return (but for Schwab at least this isn’t easily calculatable, as saving is counted as increasing portfolio weight, and buying increases the base investment, but without a proportional change in ‘Total gain’).
Since 2000 the average annual return of the SP-500 is 5.9%(6.1% for VTI since inception) and a reasonable approximation of what would be earned going forward.
Is that 5.9% after subtracting inflation?
No, it’s lower than the normal “8%” you hear because I’m not averaging across time.
[+10%, + 1%, +9%, +20%, 15%] = 9% if you average the percentages, but this represents putting in $100 at the start of each year and selling any excess gains at year end. The way people invest of putting in $100 once and letting it compound* gives
1.1*1.01*1.09*1.2*1.15 = 1.6711662 total gain or
1.6711662^(1/5) = 10.8% annualized.
The technical terms for this is non-ergodic see https://jasoncollins.blog/ergodicity-economics-a-primer/ for a description.
*Actually people do even worse then this, particularly for hedge funds: individuals put money into hedge funds that recently outperformed but go on to reverse to the mean and underperform. So while the average annual returns are +30% −6% = 12% annualized, pretty good across time, but if you did 30% managing 100M and −6% on 1B then the dollar returns are net negative.
Picking a Schelling point is hard. Since the post focused on very recent results, I thought that a one year time horizon was an obvious line. Vanguard does note that the performance numbers I quoted are time weighted averages.
You are of course correct that over the long run you should expect closer to 5-8% returns from the stock market at large.