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Finance - Investments Sub-forum: Non-Actuarial Personal Finance/Investing

 
 
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Old 01-04-2011, 04:52 AM
actuary21c actuary21c is offline
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Default In investing, it's when you start and when you finish, even over 20+ years

An excellent chart from a recent New York Times article showing that trying to predict equity returns over 10 or 20 year periods is foolish without bearing in mind the starting point, and even then has huge variability (see http://www.nytimes.com/interactive/2...ref=business):)



The above is a screenshot of the graphic from the article, here's the rest of the text below the graphic:

Quote:
In Investing, It’s When You Start
And When You Finish

WORST 20 YEARS
1961-1981
–2.0% A YEAR
2ND BEST
20 YEARS
1979-99
+8.2% A YEAR
BEST 20 YEARS
1948-68
+8.4% A YEAR
The Standard & Poor’s 500-stock index has posted double-digit gains for the second year in a row. But the index is still below where it was in early 1999.

So what is the proper perspective?

Ed Easterling, who runs an investment management and research firm from Corvallis, Oregon, faced similar questions a decade ago. In the summer of 2001, Mr. Easterling had a debate with a client about whether investors should expect to achieve long-term average returns in the future.

At the time, the average individual investor expected that the stock market would return about 10 percent a year over the next 10 to 20 years — or about 7 percent after inflation — according to surveys by the University of Michigan’s Survey Research Center, as well as UBS and Gallup.
But historical averages can vary widely depending on their starting and ending points. For example, averages that start before the 1929 crash are substantially different from those that start after it, and Mr. Easterling felt that choosing a single date was arbitrary. In response, he created the chart above, which shows annualized returns based on thousands of possible combinations of market entry and exit.

After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.

“Market returns are more volatile than most people realize,” Mr. Easterling said, “even over periods as long as 20 years.”
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