What You Can Learn from The Past 100 Years of Investment Returns

by David@MoneyNing.com · 0 comments

Did you know that your great grandfather could’ve turned $3,000 into a $41 million family estate if he just stayed invested in either the Dow Jones Industrial Average or S&P 500 since 1920? I read a fascinating piece recently from Barron’s as part of their celebration of the publication turning 100 years old. They dug into past history and found that both market indices returned about 10% a year in the past decade. If one were to be invested in the US market this whole time, a very respectable $3,000 at the time would turn into a very admirable sum of $41 million by the end of 2020.

And you didn’t have to lift a finger to build the wealth either. You didn’t need to work. You didn’t need to build a business. You didn’t need to pick the right stocks, nor did you even need to foresee and invest in disrupting companies in advance. Just good old buy and hold.

If only… right? Hindsight is obviously 20/20. As they say in the world of investing, “past performance is no guarantee of future results.” Still, the good news is that you can learn quite a bit from looking at what’s happened in the past. Here are a few golden nuggets that stick out.

Buy and hold works, as long as you keep the taxman away. Investment returns are taxed at a lower rate than earned income, but giving Uncle Sam 15, 20%, even 25% for higher amounts of your dividend income every year is still going to drastically cut down on your returns even if you never sell your shares. That’s why I always urge you to contribute to your tax-advantaged accounts.

Look at what you’ve done in the past few years. How much have you contributed? You can contribute as much as $6,000 in a Roth IRA this year, $7,000 if you are 50 or older. How many years of compound growth have you missed? How many years do you plan to continue missing? Don’t delay and get a plan together.

I started a Roth IRA for my kids the second they had earned income. By the time the kiddos retire, they will have 50 years of tax-free compound growth. This is perhaps the best financial gift I could give them. It’s not quite 100 years, but my grandkids may be able to stretch it to 100 assuming my kids don’t spend it all and the grandkids don’t cash out as soon as they inherit the fortune.

It’s almost impossible to win long-term by investing in individual stocks. It’s easy to see why anyone who invested in Tesla, Apple, Amazon, Microsoft, Walmart, or Coca Cola when it went public are going to crush index returns, but how do you identify them before the stock prices take off? And even if you were able to invest in one of these stocks that just go to the moon, how do you switch to another stock if the company becomes irrelevant? Only General Electric and US Steel from the Dow Jones Industrial Average in 1920 still exist today. Those conglomerates gave decades of incredible returns, but no one is going to say that they are really the darling of Wall St anymore. And they were the lucky ones. The other companies just went out of business. Assuming you can even predict exactly when to buy into a stock that goes to the stratosphere, and also predict its eventual demise ahead of time, will you have the fortitude to sell everything and pay Uncle Sam 25% of everything you’ve made? If not, you are going to be underperforming the index every second you delay selling.

Past history is fun to talk about but these returns are impossible to replicate even if you had a crystal ball. That’s because you couldn’t just invest in an index 100 years ago. In fact, index investing wasn’t invented until 1975, when John Bogle’s Vanguard filed the paperwork with the S.E.C. to create the Vanguard First Index Investment Trust. Now, why is it important? It’s that those “woulda shoulda coulda” aren’t as bad as you think they are. The market went crazy this past year, dropping 30% in one month and then zoomed back 50% from the lows within a year. There’s bound to be regret and a ton of articles in the media highlighting how all these people got rich. It seems like there isn’t a day that goes by without seeing another piece about how much someone made on bitcoin or Tesla stock.

The reality though, is that you didn’t miss out on the only opportunity for you to win big. Even if the returns were possible, you’d basically need to be totally ignorant of market performance to be able to stomach the volatility. Sometimes I wonder what my life would be like if I bought AMD stock years ago.

You see, when my college roommate got married, many of my friends worked at AMD and they were talking about how bad the company was doing at the wedding reception. I was doing really well then. And with money to spare, I figure I will just join in the pain and buy some shares of the company they worked for. I even had the money ready in my brokerage account, and I worked out in my head how much I was going to buy. The stock price was below $2 a share then. For some reason, I got sidetracked and didn’t put in the order. Fast forward about a decade and the current price per share is in the 90s. Forget about those 10x return people talk about. That’s roughly a 60x return. Even a modest investment would have been pretty sweet, and I was prepared to make a very respectable sum back then. Let’s just say that it would be life-changing for my family.

But then you have to wonder. Would I have stayed invested with the full position all these years? The stock went straight up into the 30s a few years back and then dropped 50% to $17 in a matter of weeks. There’s almost no way I would’ve stayed in the stock if I saw basically a fortune being cut in half, especially because $17 still meant that I made my initial investment 10 times over.

It’s good to dream that I would’ve been really rich if I just bought it and held on, but the truth is that it would be very unlikely that I still held onto everything if I did manage to buy the shares at the perfect time.

That’s why you don’t have to look at those missed investment opportunities with too much regret. Even if you did buy Tesla, or Zoom, or Bitcoin, you likely wouldn’t have held onto the whole investment all the way up.

The even better news is that there will be plenty of opportunities in the future. The past 100 years were really good, but the next 100 years may be even better. Everyone is talking about high valuations and depressed future returns and whatnot, but they are really just predicting what’s likely going to happen in the next decade. No one knows what’s going to happen far into the future. The smartphone wasn’t even invented 20 years ago and living without the device today is basically unthinkable. What innovations will change our world decades into the future is unpredictable. What we do know is that investment costs will continue to go down, investing will continue to become more accessible, and the world will keep innovating.

Have you been under-invested this whole time? If you have the means and stomach to stay the course, you have to jump in. If you play your cards right, you will be financially independent, your children will be well off, your grandchildren will be set for life and your great-grandchildren will be plenty rich.

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