Many people question how much they can earn investing in the stock market, and some question if they can earn 10%. You have to be careful making assumptions with the stock market and fully understand it for all of its nuances and intricacies. Investing in the stock market IS a good investment, but you have to be careful and prudent as well as understand that there can be risks along with the rewards. But, let’s go back to the original premise of being able to earn around 10% in the market.
In ONLY six of the last 95 years, the S & P 500 returned eight to twelve percent. ONLY six. Over that same 95 year span, it has actually averaged a NOMINAL return of about 10% which is not actually 10%. Let me explain using the chart below:
Nominal Return Versus Actual Return: First, there is a difference between a nominal return and a real or the actual return. The reason for this is that a nominal return is the gross return, but the actual or real return is the amount that has been adjusted to take into consideration inflation which historically is about 3%. Therefore, if inflation is 3% and the nominal, gross return is 10%, the real return actually is only 7%.
S&P 500 Companies Versus Other Global Companies: When tracking and noting the nominal return of 10%, it is in reference to the S & P 500 companies which are the 500 largest companies in the United States. Anyone investing globally, will probably have a different return percentage. I personally invest in the MSCI World Market as a global investor. Additionally, comparing a portfolio that has a percentage invested in Vanguard FTSE Emerging Markets EFT (VWO) against a portfolio that has the same percentage invested in Vanguard 500 Index funds (VOO) is not a practical comparison since they are vastly different.
Risk Tolerance and Long-Term Assumptions: Be cautious and conservative with long-term assumptions. Moreover, understand where you are in your investing. There is a huge difference in the types of investments for a 25-year-old investor compared to a 55-year-old investor. Each of these investors should have different portfolios to reflect where each is in his or her investing and how aggressive or conserative the investments are to best meet their individual financial goals and needs. It is important to understand your risk tolerance and your investment timespan. Those who have more time in the market may be less likely to jump at losses and react to negative market changes, realizing that the market fluctuates. Those drawing from their portfolios may make more assumptions and be more reactionary.
A Sideways Market Versus A Climbing Market: Naturally the market is not always going to climb upwards, but will dip and even stall or stay somewhat lateral or sideways. This is best illustrated by the following chart that shows that the S&P 500 was at 980 on August 9, 2002, and at 896 on July 2, 2009.
This chart demonstrates the long stretches of time when there was no real return, and times when the stock lost money, But it is quite important to take into consideration your long-term planning as noted above.
Overall Things to Consider: My feeling, along with that of many investors, is to be conservative in your investing and in your assumptions in order to reach your target goals. Let me demonstrate this by using the following two examples to illustrate how financially detrimental a small assumption difference from 8% to 10 % can be.
Situation: If you invested $500.00 a month for 40 years assuming 8% return, the result would be
$1,745,503. Comparatively, the same amount for the same length of time, assuming a 10% return, would result in $3,162,039. Even though that is only 2%, the difference is $1,416,536!
Bottomline: It is key to understand your investing comfort level and to be conservative with your long-term assumption when planning and making financial investment decisions. If you need more help or have questions about this or any financial decisions, I would be happy to help you on your financial journey. Feel free to contact me at Budgetdog.