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What is the Average Return Rate of the Stock Market

What is the Average Return Rate of the Stock Market

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Published by Zain Khwaja

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Published by: Zain Khwaja on Jun 25, 2010
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06/25/2010

 
MONDAY, MARCH 29, 2010
What is the Average Return Rate of the Stock Market?
Much ado has been made about the prudence of long-term investing in the stock market. Mutual funds areoften quoted as having10%/year long-term growth. Burton G. Malkie (author ofA Random Walk Down Wall Street) recommends the average investor would do better by purchasing an unmanaged index fund(specifically the Wilshire 5000 for the U.S. market) over a managed mutual fund. This post will track stockmarket returns by consideringhistoric S&P 500 datafrom 1871-2009 pieced together by Robert Shiller (authorofIrrational Exuberance). I say pieced together because themodern S&P 500didn't exist until 1957. The above graph plots the history of a $1 investment in 1871. The bottom curve (blue) shows the price historyof index, while the top curve (red) shows the price history of an investment with dividends reinvested. Theindex itself tracksinflationclosely (the index has an average return rate of 3.91%/year -- not much higherthan the 3.26%/year that theCPI datagives). The investment with dividends reinvested has an average annualreturn rate of 8.61%/year. To calculate these rates, I took the ratio of the value of the investment at one yearto the value from the previous year. I then took ageometric meanof these values to come up with theaverage return rate.The below graph is somewhat more interesting because it has been CPI-adjusted. All values are given in 2009dollars. 
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