Monday, March 2, 2009

Stock Market Returns Long Term

What I want to discuss today, is the long term implications of investing in the market. I was reading a book review of a new book called “The Cure for Money Madness” by Spencer Sherman. He talks about the predictability of US S&P 500 Index. For every 10 year period, from 1926 to the end of 2008, this index had positive returns except for 2 years. For the 10 year period from 1929 to 1938, the return of -8.6% and the 10 years from 1930 to 1939 the return was -1%.

The 10 years decline in the stock market occurred during the most brutal years of the Great Depression. This was a time when the world’s economy sank to its lowest point in recorded history. The heavy losses of the stock market crash give birth to the legendary image of investors jumping out of windows high above Wall Street. The losses in that market were very intense.

But another way of looking at this is that 97.3% of the time, the S&P 500 had positive returns for every 10 year period. Also, the S&P 500 had a higher return that one-month Treasury Bills 89% of the time. One-month Treasury Bills are about the safest investment. The S&P 500 also had returns higher than inflation 91% of the time.

What I want to turn to now is the TSX index. I have statistics for this index going back to 1957, the start of the index. See my spreadsheet at If you look at the TSX index, the number of 5 year periods where the average yearly return on the index was negative is 2. These are the periods from 1970 to 1974 where it was -2.13 and from 1973 to 1977 where it was – 1.64. This means that for all the 49 5 year periods, the average yearly return was negative twice or 4% of the time. This also means that for these 5 year time periods, it was positive 96% of the time. There was no time period in the other periods where the average yearly return for the index was negative.

For the TSX, I also looked at how much of the time the return for the various periods TSX return was less than an average of 6% per year. For the 5 year periods, the 5 year average return was less than 6% for 16 periods or 33% of the time. Looking at the 10 year periods, the 10 year average return was less than 6% for 10 periods or 23% of the time. Looking at 15 year periods, the 15 year average return was less than 6% for 2 periods or 5% of the time. Looking at 20 year periods, the 20 year average return was less than 6% for 3 periods or 9% of the time. There were no other periods when the TSX return average per year less than 6%.

I also looked at the TSX index like Spencer Sherman for periods where the index return over the period was negative. For the 5 year periods, I found 3 times when the index declined over the 5 year period. The total 5 year return from 1969 to 1974 was -17.2%. The total 5 year return from 1972 to 1977 was -13.6%. The total 5 year return from 1997 to 2002 was -1.3%. There was only one 10 year period loss and that was from 1964 to 1974 and the loss was -1.1%.

The other thing we should consider is that dividends make up 30% of the TSX’s total return on average. That means that the TSX total return is really 30% higher than shown by the index. So, if you invest in dividend paying stock, you can make very decent return over the long term. We need to keep this in mind when the stock market plunges as it has been doing of late.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website at for a list of the stocks for which I have put up spreadsheets on my web site.

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