While putting together my S&P 500 Fun Facts post, I created an Excel spreadsheet to analyze the returns of the S&P 500 Index. I got the original S&P 500 returns as well as the inflation numbers in Ibbotson’s Stocks, Bonds, Bills, & Inflation. I then used those numbers to create 5, 10, and 20-year rolling period real returns. After I posted my findings in a couple of posts (here and here), I decided to create some bar charts to help illustrtate the impact of time on returns. These charts present the information in a way you just can’t get from looking at a column of numbers.
First we’ll start by looking at 1-year annual real returns:
Out of the 81 one-year periods from 1926 – 2006, 26 years experienced negative REAL returns. By “real” I mean returns that are adjusted for inflation using that particular year’s CPI. There were 38 years in which the real return was less than 10%. Real returns exceeded 10% in 43 of the 81 years (53% of the time).
Now let’s move to 5-year holding periods and see what happens:
By 5-year rolling periods, I mean beginning in 1926 and going out 5 years through 1930, for a 5-year period. The next 5-year period starts at 1927 and goes through 1931. The last rolling 5-year period was 2002 – 2006. As you can see from the bar chart, there were a lot less 5-year rolling periods with negative returns. In fact, of the 77 periods 5-year rolling periods, 19 had negative average annual real returns throughout the period. Over sixty-one percent of the periods (47 out of 77) had average annual real returns of less than 10%. The average annual real return for ALL 77 5-year rolling periods was 7.03%.
Here’s what happens when we go to 10-year holding periods:
Here’s the breakdown of the area in the circle, which shows the impact that inflation has on returns:
What the graphic above shows is that from 1965 – 1974, the average annual rate of return for the period was 1.24%. However, due to inflation over the same period, the average annual REAL return was actually -4.62% over the ten-year period. Bottom line: inflation has a very real impact on returns.
Finally, let’s take a look at 20-year holding periods:
Notice that of the 62 20-year rolling periods, NONE of them had negative annual average real returns. The worst 20-year period was from 1962 – 1981, which had an average annual real return of just .52%. The rest of the periods were much better than that.
It’s amazing to me how time smooths out the individual bumps in the road.
DISCLAIMER: As with everything, past returns are no guarantee of future returns. Invest at your own risk.