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Suppose I want to know "if I want to make a 30% return on the stock market, how many years should I expect to wait?"

I know the real answer is "it depends - if the market does horrible it could never happen, or it could happen in a single year". But I want to ignore bubbles and crashes since I'm a long term, passive investor.

Are there any rules of thumb such as, "on average, after 5 years you will start to see a return of 1%, after 10 years 5%, after 30 years 10%"?

It seems like with a bit of math (confidence intervals etc.) you could derive this info. Has anyone done this already?

  • Thank you for the replies so far. I'll wait a while before accepting. I should have also asked "is there a table of annual highs and lows?". Here's what I found:econstats.com/eqty/eqea_mi_1.htm – Sridhar Sarnobat May 3 '12 at 21:31
  • I think the question I really want to ask myself is 'what's the longest period of time that I could be in the red?' I believe there's a technical term for it, but the answer appears to be about 15 years (from 1928 to 1944 using the DJIA). – Sridhar Sarnobat May 3 '12 at 21:58
  • If you invested in the S&P 500 index fund in 2000 when it first broke 1500, you have yet to get above ~5% above that level. 12 years and counting. en.wikipedia.org/wiki/S%26P_500#Market_statistics – mhoran_psprep May 4 '12 at 3:44
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The Center for Research in Security Prices from the University of Chicago Booth School of Business has thorough tables and graphs with the properties of stock returns from 1926 to today.

http://www.crsp.org/resources/investments-illustrated-charts

You may want to particularly look at the graph "Investing for Long Term" that address your question of how many year one can be in the red.

Over a 5-year period the probability of losing money in stock markets is 12.2%. That is, randomly buying and selling at any 5-year period between 1926 to 2018, 12.2% of those draws you will lose money.

CSRP: Probability of losing money in the stock market: the importance of long-term perspective

This probability drops to 5.5% over a 8-year period. Hence, if you buy today and wait more than 8 years, based on past probabilities, there is a 5.5% change that in the next 8 year you will lose money.

The annual nominal rate of return between 1926 to today for stocks in the USA is 10%. This is a nominal rate. This implies that the equity premium, that is, the difference between equity return and risk-free assets, is between 4%-5% (see Eugene Fama & Kenneth French 2002, https://onlinelibrary.wiley.com/doi/full/10.1111/1540-6261.00437). Though bear in minds that stock prices are highly volatile and that means that the equity premium is highly volatility. A VIX is a proxy for the equity premium, if the VIX moves, it is likely that the equity premium is moving as much (see Martin 2017, https://academic.oup.com/qje/article/132/1/367/2724543 )

CSRP: Table with historical compounded annual nominal returns for different portfolios

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Well depends but "on average" the stock market has historically returned somewhere around 10% per year. Note, this can vary wildly from year to year see http://en.wikipedia.org/wiki/S%26P_500#Market_statistics

So it would be roughly 2.8 years to get your 30% if you happen to get the average market return for those 3 years, but the chances of that happening exactly are slim to none. You could end up with +50% or -30% over that ~3 year period of time - so the calculation doesn't do you that much good for that short period of time, but if you are talking a span of 30 years then you could plan using that as a very rough ballpark.

Good rule of thumb is you shouldn't put any money in the stock market you think you will need anytime in the next 5 years.

Formula to figure out total gain would be Principal x (1+ rate of return) ^ years

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  • Nice numbers, but they omit taxes and inflation. Your inflation-adjusted after-tax return will be less than 10%. :) – user296 May 4 '12 at 23:55
  • I agree totally - but that's why said "very rough ballpark". Inflation is very hard to plan for or estimate and even then stocks are probably one of the better asset classes to be in when it comes to inflation. Taxes again there are so many variables, IRA vs taxable account, future tax rates, etc that it very hard to plan with any certainty - thus the conclusive "very rough ballpark" advice :-) – Jeremy Coenen May 8 '12 at 13:28
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The Money Chimp site lets you choose two points in time to see the return. i.e. you give it the time (two dates) and it tells you the return.

One can create a spreadsheet to look at multiple time periods and answer your question that way, but I've not seen it laid out that way in advance.

For what it's worth, I am halfway to my retirement number. I can tell you, for example that at X%, I hit my number in Y years. 8.73% gets me 8/25/17 (kid off to college) 3.68% gets me 8/25/21 (kid graduates), so in a sense, we're after the same type of info. With the long term return being in the 10% range, you're going to get 3 years or so as average, but with a skewed bellish curve when run over time.

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It depends on what stocks you invest in or whether you invest in an index, as all stocks are not created equally.

If you prefer to invest directly into individual stocks and you choose ones that are financially health and trending upwards, you should be able to easily outperform any indexes and get your 30% return much quicker. But you always need to make sure that you have a stop loss placed on all of your stocks, because even the best performing companies can go through bad patches. The stop loss prevents you from losing all your capital if the share price suddenly starts going south and turns into a downtrend.

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    "you should be able to easily outperform any indexes and get your 30% return" - wow. Really? Then why isn't every paid money manager (mutual funds included) beating the index? The typical investor lags the market by many, many percent. How do you come to this conclusion? – JTP - Apologise to Monica May 4 '12 at 1:41
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    I'm going to take a moment to add this comment and pledge - I asked a question challenging your assumption here, but I was not the downvote, I was asking for an understanding of your thought process, not taking a shot at you. My pledge is that I will comment with a "-1" any time I actually downvote on this board. – JTP - Apologise to Monica May 4 '12 at 22:27
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    The big question is: For each of the private investors you know who regularly beat the market, how many private investors are there who lose all their money? And how does a private investor know that a stock is "financially healthy" and "trending upwards"? – Lagerbaer May 5 '12 at 15:22
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    I can see that, but how does your reply fit in with your first statement that "you should be able to easily outperform any indexes"? Hard work, education, training in investing doesn't sound "easy" at all. – Lagerbaer May 7 '12 at 19:01
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    @Lagerbaer, just as an electrician makes wiring a new house look easy, or an engineer makes constructing a bridge look easy, or an Olympic swimmer makes swimming the 100m freestyle in record time look easy, or any other trade makes the work they do look easy, they required an education and/or training, experience and hard work to get to where they are today. And that goes with almost anything you do in life. What you get out of whatever you are doing depends on what you put into it. So why should investing be any different. If you don't want to put in the hard yards then pay someone to do it. – Victor May 8 '12 at 0:22

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