April 22, 2014 Comments

Tuesday, the S&P 500 and Toronto each gained 0.4%

Yesterday’s chart showed that over 30-year periods the S&P 500 total return (including reinvested dividends) had never failed to compound wealth at at least 4% on a real basis, 4% after deducting inflation. And it was only under 5% in those 30 year periods that included substantial inflation.

Unfortunately the same cannot be said for shorter time periods like tens years. The following graph shows the real return from the S&P 500 over rolling ten year periods.

April 22, 2014 - Comments

The graph above shows that there have been occasions where holding stocks for ten years resulted in a negative real return. Most of these periods covered the worst of the high inflation years. The other time it happens was in the ten years ended at the end of 2008 and 2009 which was caused by investing at the top of a market bubble and then experiencing two market crashes.

The point is though, when it comes to holding stocks and especially if one holds the majority of their wealth in stocks, one should have a time frame in mind of something more than ten years.

Despite their supposed safety, the real returns from long-term bonds were negative over ten year holding periods FAR more often than was the case with stocks.

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