Jul 16

“The market has averaged 10.4%, long term.” Well, that may be, but for any period shorter than “long term,” we need to be careful how we make our projections. Let’s look at what happens when we ignore that lesson.

SPlongterm(A right click will open the chart for better viewing) From this chart of the S&P, you can see that from 1980 to 1990 if you simply drew a straight line, and continued that line through 2000, stocks continued on an amazing return path. Note, the graph is semi-log, which means that a straight line represents constant annual growth. So if the S&P grew at exactly the same rate from 1990 to 2000 as the decade prior, the graph would follow the straight line. From 1990-1995 it underperformed a bit, but then accelerated and grew above the trend line I drew. Now, if instead of adjusting the line to a higher growth rate we simply continues to extend it, the S&P would have a present value of 3600, nearly 4 times where we are today. 9 years ago, 3600 was just an extension of a 20 year long trend, now it seems like a lifetime away.

written by Joe

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