Thursday

The 10% Average Market Return Lie, and What It Means to Investors

Talk to almost any financial advisor, and they will tell you that the stock market, “long-term”, averages a 10% rate of return.  They love to point to the past 70 years, in an attempt to prove their case.  If you ask them to define “long-term”, they will almost certainly say, “10 years or longer”.

And you know what?  Over the last 70 years, the market has averaged a 10% return per year.  But here’s my question.  We have market data going back to 1896, so why are we using just part of the data and not all of it?

Once we start looking at all the data, the answer becomes very clear.  All the data doesn’t support a 10% average return, and that is a message that big brokerage firms would prefer not to get out.

I like to get right answers, so here’s what I did.  I downloaded the history of the Dow Jones Industrial Average since it started (or at least since we have data on it) in 1896.  I got the data from Dow Jones itself at www.djindexes.com.

Then, to keep it simple, I started calculating year-by-year returns and grouped them by decades.  I started with 1900 – 1909, then went to 1910 – 1919, and so on.  I started in 1900, because the data only went back to 1896, and I didn’t want to do 1896 – 1905, 1906 – 1915, etc.  So my analysis does leave out the first few years.

What I Learned

Here’s what I learned about how the market performed over the decades, starting in 1900:

Decade Return Return + 3% Dividend

1900 – 1909                          +4.19%                                   +7.19%

1910 – 1919                          +0.80%                                   +3.80%

1920 – 1929                          +8.77%                                   +11.77%

1930 – 1939                          -4.92%                                    -1.92%

1940 – 1949                          +2.95%                                   +5.95%

1950 – 1959                          +12.98%                                 +15.98%

1960 – 1969                          +1.65%                                   +4.65%

1970 – 1979                          +0.47%                                   +3.47%

1980 – 1989                          +12.62%                                 +15.62%

1990 – 1999                          +15.37%                                 +18.37%

2000 – 2008                          -2.96%                                    +0.04%

Average Return                   +4.72%                                 +7.72%

Continue…