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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

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

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

–2.0% A YEAR
+8.2% A YEAR
+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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Old 01-11-2011, 02:12 PM
Spectrum Spectrum is offline
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That distribution will hold if you put all your savings in at one point in time. Most people set aside money each year. The volatility of the 20 year returns will be less if you model that pattern.
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Old 01-11-2011, 02:19 PM
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JMO JMO is offline
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Originally Posted by Spectrum View Post
That distribution will hold if you put all your savings in at one point in time. Most people set aside money each year. The volatility of the 20 year returns will be less if you model that pattern.
I was just thinking along the same lines. One of the advantages of dollar cost averaging is a reduction in volatility, right?
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Old 01-11-2011, 02:46 PM
HatCapitol HatCapitol is offline
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I wonder what this would look like on a nominal basis, which is how return is generally reported. I think showing it on a real basis makes it look worse, which is what the illustrators were going for.
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Old 01-20-2011, 01:49 PM
Spectrum Spectrum is offline
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If long run US stocks have returned 10% a year and inflation averaged 3% a year, you would wind up with a 7% real return per year. Not sure if the volatility of real returns is higher or lower.

More thoughts on dollar cost averaging: If you slowly change your investment mix towards bonds as you get older you can dollar cost average out as well.
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