The New York Times published a really great chart a couple of years ago that every investor should be familiar with.  They actually got it from Ed Easterling with Crestmont Research.  It demonstrates just how much variation there can be in investment returns depending on what the investing environment looks like over your lifetime.  The chart has apparently been constructed using dividends, average taxes (although the rate is unknown), “average fees” (again unknown) and is adjusted for inflation so these are all real numbers.

This chart shows annualized returns for the S.& P. 500 for every starting year and every ending year since 1920 — nearly 4,000 combinations in all. READ ACROSS THE CHART to see how money invested in a given year performed, depending on when it was withdrawn.
NYT Graph


There are several noteworthy lessons to learn from this chart.  First, in the long run, you would have at least beat inflation by investing in the S&P 500.  Even if you invested at the peaks of the market in The Great Depression, you would have had a positive real return within 20 years (although admittedly that's still a long time.)

Second, there are three big splotches of red on the chart- the Great Depression, Stagflation in the 1970s, and the 2000s.  Our lost decade is hardly new. The good news is that the dark red splotches don't go out very far.

Third, there is far more red in the 1970s than there was in the 1930s.  High inflation is a serious foe for an investor.

Fourth, and perhaps most importantly, there just isn't much green on the chart, especially over long periods of time.  If your investment plan requires 7%+ real returns, you're probably overly optimistic.  The chart tells me that insofar as the future resembles the past, real long-term returns from US Large Cap stocks should be in the 2-6% range.  Mixing those large cap stocks with assets with lower expected returns like bonds is likely to bring your overall portfolio returns even lower.  Adding some riskier but possibly higher returning assets such as small value stocks or emerging market stocks might increase it somewhat.  My investment plan calls for 5% real returns for my entire portfolio.  After nearly a decade, I'm still trailing that slightly, something around 4.3% last I checked. [Update: I'm over 5% after our recent run.] That's with a portfolio that has about as many asset classes that are riskier than US large cap stocks as asset classes that are less risky.

Fifth, the market timing that probably matters isn't something in your control.  If your high earning years (and thus saving years) were in the 1970s, you were just screwed.  You had to either save more or live on less in retirement than those who came a decade before you or a decade after.  If your peak earning years were the 1980s, you had it made in the shade.  If they were, say 1997-2007, then you were hosed.  The unknown variable, of course, is how the chart will look for those of us whose peak earnings years are in the 2010s and 2020s.  I'll let you know in about 50 years.

Lastly, remember the chart has been adjusted for fees and taxes.  If you can successfully minimize these (something within your control) perhaps you can get a reasonable return even if your peak earning years fall on hard times.  Increasing your return by just 1 or 2% can make a world of difference over the long run.

Comments?  What do you learn by looking at that chart?