The Investment Scientist

What Stock Returns Look Like in 20 Years

Posted on: March 8, 2016

inflation.pngRecently, I did a long horizon return study based on 100 years of stock market data and inflation from 1916 to 2015.

The study assumes a 20-year investment horizon. If your primary reason for investment is for retirement security, this is the horizon that should apply.

In the study, I looked at rolling 20-year stock returns, inflations and (after inflation) real stock returns. I present the results in the table below. The first and second columns are the beginning and ending years of the 20- year period. The third column shows the nominal growth of $1 invested in S&P 500 in the corresponding period. The fourth column shows the shrinkage of $1 due to inflation in the corresponding period. The fifth column shows the real (after inflation) growth of $1 invested in S&P 500.

There are some fantastic insights from the data:
  1. During the last 100 years, inflation (cash is losing value) is the norm, while deflation (cash is getting more valuable) only occurs during the Great Depression.
  2. In the 20-year span that has the worst inflation (between 1968 and 1987,) cash loses 71% of its value.In the medium case, cash loses 45% of its value in 20 years.
  3. During the last 100 years, stocks always make money in any given 20-year period. Even in the worst 20 years (between 1929 and 1948) which includes the Great Depression, you get $1.95 for $1 invested in stocks. (If you use my dividend strategy, you could do a lot better.)
  4. In the medium scenario, stocks give you 4 times real return; In the best scenario, stocks give you 10 times real return and in the worst scenario, stocks give you only 1.17 times real return. Since nobody invests a lump sum and takes out a lump sum, it’s the medium or average scenario that is most applicable to an investor.

The biggest takeaway from this study is this: stocks always beat cash if you have a 20-year investment horizon. Cash may not fall like stocks in the short term, but in the long term, it is far more riskier!

 

Begin Yr End Yr $1 grwth $1 infltn $1 real grwth
1916 1935 $4.36 $0.75 $3.25
1917 1936 $5.44 $0.83 $4.51
1918 1937 $4.93 $0.95 $4.69
1919 1938 $4.74 $1.18 $5.59
1920 1939 $4.06 $1.35 $5.48
1921 1940 $4.48 $1.38 $6.16
1922 1941 $3.53 $1.12 $3.94
1923 1942 $3.20 $1.00 $3.20
1924 1943 $3.93 $0.99 $3.91
1925 1944 $3.76 $0.97 $3.65
1926 1945 $4.02 $0.98 $3.95
1927 1946 $3.23 $0.82 $2.66
1928 1947 $2.50 $0.74 $1.85
1929 1948 $1.95 $0.71 $1.39
1930 1949 $2.35 $0.73 $1.72
1931 1950 $3.92 $0.64 $2.52
1932 1951 $8.25 $0.55 $4.54
1933 1952 $11.15 $0.49 $5.47
1934 1953 $7.37 $0.49 $3.62
1935 1954 $11.13 $0.50 $5.59
1936 1955 $10.26 $0.51 $5.28
1937 1956 $7.99 $0.51 $4.05
1938 1957 $10.46 $0.51 $5.30
1939 1958 $11.96 $0.48 $5.79
1940 1959 $13.30 $0.48 $6.33
1941 1960 $14.61 $0.47 $6.91
1942 1961 $21.09 $0.52 $10.90
1943 1962 $16.50 $0.56 $9.17
1944 1963 $15.86 $0.56 $8.93
1945 1964 $15.45 $0.57 $8.81
1946 1965 $12.65 $0.57 $7.24
1947 1966 $12.71 $0.65 $8.30
1948 1967 $14.63 $0.69 $10.10
1949 1968 $15.68 $0.68 $10.65
1950 1969 $11.93 $0.63 $7.47
1951 1970 $9.51 $0.63 $5.97
1952 1971 $8.59 $0.64 $5.54
1953 1972 $8.91 $0.63 $5.60
1954 1973 $7.38 $0.58 $4.30
1955 1974 $3.74 $0.51 $1.92
1956 1975 $3.83 $0.48 $1.85
1957 1976 $4.43 $0.47 $2.10
1958 1977 $4.59 $0.46 $2.10
1959 1978 $3.61 $0.43 $1.54
1960 1979 $3.75 $0.38 $1.44
1961 1980 $4.88 $0.35 $1.69
1962 1981 $3.67 $0.32 $1.17
1963 1982 $4.81 $0.31 $1.50
1964 1983 $4.84 $0.31 $1.48
1965 1984 $4.35 $0.30 $1.29
1966 1985 $5.06 $0.29 $1.47
1967 1986 $6.83 $0.30 $2.03
1968 1987 $5.68 $0.29 $1.67
1969 1988 $5.87 $0.29 $1.73
1970 1989 $8.62 $0.30 $2.58
1971 1990 $8.24 $0.30 $2.45
1972 1991 $8.85 $0.30 $2.64
1973 1992 $8.39 $0.30 $2.51
1974 1993 $11.03 $0.32 $3.49
1975 1994 $14.87 $0.35 $5.15
1976 1995 $14.90 $0.36 $5.39
1977 1996 $14.99 $0.37 $5.50
1978 1997 $20.97 $0.38 $8.07
1979 1998 $24.37 $0.41 $10.07
1980 1999 $25.08 $0.46 $11.43
1981 2000 $18.25 $0.50 $9.05
1982 2001 $16.29 $0.53 $8.67
1983 2002 $11.02 $0.54 $5.95
1984 2003 $10.94 $0.55 $6.01
1985 2004 $11.79 $0.55 $6.52
1986 2005 $9.65 $0.56 $5.36
1987 2006 $8.90 $0.55 $4.87
1988 2007 $9.42 $0.55 $5.18
1989 2008 $4.86 $0.57 $2.78
1990 2009 $4.82 $0.58 $2.81
1991 2010 $5.61 $0.61 $3.43
1992 2011 $4.71 $0.61 $2.88
1993 2012 $4.77 $0.62 $2.95
1994 2013 $5.63 $0.63 $3.52
1995 2014 $6.49 $0.64 $4.14
1996 2015 $4.80 $0.65 $3.11
medium value $7.38 $0.55 $4.14


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Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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