“You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do you, punk? — Dirty Harry
Depending on what source you pull and when you look, you’ll probably find the average annual return for the S&P 500 to be somewhere around 10%, going back to 1957 when the S&P adopted 500 stocks into the index. That’s an average from about two thirds of a century so the lumpiness of annual market returns has been smoothed out over time. Thus, the expectation of an average annual return of 10% can be misleading, depending on how much time you have to invest and how lucky or unlucky you are within that time frame.
In my case, as a middle-aged man, I have about a twenty year window left for investing into a heavily stock weighted portfolio. Let’s have a look at some twenty year intervals, shall we?
S&P 500 Annualized Real Total Return Over Intervals of Two Decades, including dividends and adjusting for inflation
| 1900 | 2.7% |
| 1920 | 9.1% |
| 1940 | 9.8% |
| 1960 | 1.9% |
| 1980 | 13% |
| 2000 | 3.9% |
Wow, that’s scary. What if my twenty year window looks like 1900 – 1920, 1960 – 1980, or 1980 – 2000? I’m toast! Hopefully, I’m lucky and the next twenty years in the stock market looks more like 1920 – 1940, 1940 – 1960 or 1980 – 2000. Out of this data set, I’m looking at a 50/50 chance of retiring in the United States versus riding out the rest of my days in a low cost, third world country where I’ll make YouTube videos about how great life is there.
Scarier still, what if I only had a ten year window left?
S&P 500 Annualized Real Total Return Over Intervals of One Decade, including dividends and adjusting for inflation
| 1910 | -1.8% |
| 1920 | 16.6% |
| 1930 | 1.9% |
| 1940 | 3.3% |
| 1950 | 16.3% |
| 1960 | 5.2% |
| 1970 | -1.3% |
| 1980 | 11.4% |
| 1990 | 15% |
| 2000 | -3.1% |
| 2010 | 11.2% |
I’d be screwed if my ten year window looked like 1910 – 1920, 1930 – 1940, 1940 – 1950, 1970 – 1980, 2000 – 2010 and probably even 1960 – 1970. Based on this data set, it’s a 40/60 chance of the U.S. versus Rwanda for retirement!
And so, boys and girls and others who are younger than this middle-aged man, what’s the lesson, here?
Invest as early as you can, as much as you can, as often as you can.
Obviously, you want the advantage of compounding, but you also want your investment window of opportunity to be as long as possible because there will be intervals when the market will go against you, and you don’t want to be relegated to such an interval being your ENTIRE investment window. The longer you wait to get serious about investing, the more you’ll have to ask yourself, “‘Do I feel lucky?’ Well, do you, punk?”
With Love,
P. Gustav Mueller, author of The Present