You are owed nothing
by Michael Batnick, The Irrelevant Investor
People invest their hard earned dollars to earn a return above and beyond inflation. At a three percent inflation rate, your purchasing power would get cut in half over twenty years. As the value of your dollar diminishes over time, the goal when investing is to maintain and even grow the value of your money.
Youâve seen this chart before, it shows that $1 invested in 1926 would have grown to $5,386 today, a whopping return of 538,547%, or 10% a year.
What you donât always see is the real growth of $1, or what the returns would be after you factor in inflation. Once this is accounted for, stocks have returned 40,670% over the last ninety years, or 6.9% a year (I used an arithmetic scale here for affect, the chart above uses a log scale).
The chart above clearly demonstrates how much inflation eats into returns. Still, an 8.5% average real return, or 6.9% compounded is pretty darn good. If an investor earned 6.9% for twenty years, their total return would be 280%. Sounds good right? Hereâs the kicker. Real returns arenât owed to anybody, theyâre earned the hard way.
Over all ten-year periods, the real rate of return for stocks has been positive 85% of the time. While these are pretty good odds, you probably wouldnât feel invincible if somebody told you there was a 15% chance that you could lose money investing over the next decade. The image below illustrates that investing is not for the faint of heart.
As youâre probably painfully aware, the S&P 500 hasnât made any progress over the last two years. If youâre feeling a little frustrated, I have some bad news for you, this is how stocks work. The stock market doesnât owe you anything. It doesnât care that youâre about to retire. It doesnât care that youâre funding your childâs education. It doesnât care about your wants and needs or your hopes and dreams.
I absolutely believe that stocks are the best game in town. I donât think there is a better way for the average investor to grow their wealth. However, this is called investing and the price of admission is gut wrenching drawdowns and sometimes years and years with nothing to show for it. If you can accept that this is the way things work, you can be an enormously successful investor.
Copyright © The Irrelevant Investor