VTS Community,

I showed the S&P 500 annual return distribution in yesterdays blog and I had a few follow up questions about why it doesn’t seem to match up with the annualized return  (CAGR)

So first, here is that distribution:


Just eyeballing that it does appear that the S&P 500 should have long term returns a little higher than what they actually are.

Here are the annualized return statistics over different time periods.  Of course it varies a little bit depending on the start date, and it’s highly dependent on how many bull and bear markets each date range includes.

If you want to test your own periods, here is a return calculator:


So it doesn’t look like 5.74% in the distribution chart does it?  But remember my often stated quote  (so far hasn’t caught on)

“Losses are more costly to a fund than gains are beneficial”  –  Brent Osachoff

Recall from my “Maximum Drawdown” video that any time losses are taken it’s exponentially harder to recover from them.


In the case of the S&P 500, those years where it lost 30-45% were costly.  In periods like February 2007 – March 2009 where the S&P 500 lost 57% of it’s value, it requires huge gains  (132%) in subsequent years to recover.  When the S&P 500 lost 86% of it’s value in the great depression, it takes a string of very impressive yearly gains to get that 614% return required to break even.

So don’t let that distribution chart fool you.  The S&P 500 has returned 5.74% annualized since 1928.  When adjusted for dividend reinvestment and inflation which is always the most realistic measure, it’s just 6.61%.  That’s what buy and hold investors would actually have achieved give or take, and the reason is because of the occasional massive drawdown that derails much of the progress made during bull markets.

But it does have many more good years than bad which was my point.  If bank analysts were going by historical record and actual data, regardless of what the 90 year return is, wouldn’t their single year predictions more reflect what we see?  Why don’t a single one of them have a prediction that is even at the long term median?  Every bank is predicting a below average year?  Or are they just hedging their bets by not saying anything of substance?


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