Don’t be mislead by what you may have read or have been told about historical stock market returns. You may have heard that stocks have averaged over a 10% per year return over the last 80 years. What you probably have not heard is that risk-free long term Treasury bonds have outperformed stocks in two-thirds of those years.
Here’s some factual data on inflation and stock and bond returns over the last 80 years for your consideration when thinking about the effect of rising costs and the risks of investing your money.
History of inflation
In 1947, inflation averaged (12-month average) 14.4%.
From 1948 to 1952, it ranged from -1.2% to 8.1%.
From 1953 to 1973, it ranged from -0.4% to 6.2%.
From 1974 to 1978, it ranged from 5.8% to 11.0%.
From 1979 to 1982, it ranged from 6.2% to 13.5%.
From 1983 to the present, it ranged from -0.4% to 9.1%.
Effects of inflation
With 1.9% current inflation, prices double every 36.8 years.
With the 3.2% long-term inflation average for the U.S., prices double every 22.0 years.
With 13.5% inflation as occurred in 1980, prices double every 5.5 years.
In October of the following year (1981), the prime rate hit 18.45%. And mortgage rates exceeded 20%.
Stock bear markets
In the following 6 months beginning in December 1961, the S&P 500 lost 22.5%.
In the following 18 months beginning in December 1968, the S&P 500 lost 29.0%.
In the following 23 months beginning in January 1973, the S&P 500 lost 43.4%.
In the following 4 months beginning in August 1987, the S&P 500 lost 26.8%.
In the following 30 months beginning in August 2001, the S&P 500 lost 43.7%.
In the following 17 months beginning in October 2007, the S&P 500 lost 50.8%.
Note that to recover from a 50.8% loss, you need a subsequent gain of 1/(1-.508) minus 1 = 103.2% just to break even.
Also note that for long periods of time stock market returns, adjusted for inflation, have been zero or very close to it. One example: the 24 years from 1968 to 1992. A second more recent example: from its peak on March 24, 2000 to September 21, 2017, the S&P 500 index (SPX) had an annualized return of less than 1% after inflation.
What about the NASDAQ? From 1985 to 2000, it returned zero. Significant stock market gains are made disproportionately in much shorter time periods by a small percentage of stocks, and long-range returns are heavily impacted by severe bear markets like those that incurred in the years 2000-2002 and 2007-2009.
Bond bear markets
From the 1940s to the 1980s, long-term government bonds lost about 60% of their value after taking into account the effects of inflation.
Past and future reminders
The next 30 years are not likely to replicate the last 30 where:
Interest rates have gone from high to low, and low to high.
Government debt went from low to high, and then higher. And then still higher.
Inflation went from high to low, and is rising again.
Consumer debt went from low to high.
Bonds have enjoyed an unprecedented bull market. That is now ended.
One possible future
Rising government debt (deficits) to unprecedented levels. Probability – very high.
Rising inflation. Or deflation.
Rising consumer debt. Probability – high.
A bear market for bonds. Already here.
Reduced or falling GDP growth.
Falling equity prices. Probability of reversion to the mean – very high.
So, what should we conclude?
Never assume the present will necessarily extend unchanged into the future.
If you decide to invest in the market, be clear on your goals and realistic as to their attainability.
Avoiding substantial losses should always be a critical investment goal.
Assuming future stock market gains are likely to reflect past market gains is a really bad idea, especially when doing retirement planning.
Paying yourself first through saving and living below your means are strategies that, unlike the stock market, you can actually control.