Returns are not so important, duration is !

July 1, 2024 3 min read

Understanding S&P 500 Returns Over 95 Years

Over the past 95 years, the S&P 500 has provided valuable data on market returns. This data is not only relevant to the US market but can also be applied to other markets, including India. The key takeaway from this data is the importance of staying invested in the market for the long term to maximize returns and minimize losses.

Source : Charlie Bilello

One-Year and Three-Year Market Returns

For those who held their position in the S&P 500 for one year, the maximum gain was 52%, while the maximum loss was 43.8%. When extending the holding period to three years, the maximum gain was 30% per year, and the maximum loss was 27% per year. These figures show that while short-term investments can yield high returns, they also carry a significant risk of loss.

Five-Year and Ten-Year Market Returns

If the investment period extends to five years, the maximum loss reduces to 12.7%, and the maximum gain is 28.3%. Over a ten-year period, the maximum loss further decreases to 1.7%, and the maximum gain stands at 20%. These numbers indicate that the longer you stay invested, the lower your chances of incurring a loss.

Long-Term Investments: 20 and 30 Years

Investing for 20 years or more virtually guarantees positive returns. For a 20-year investment period, the minimum gain is 2.4% per year, with a maximum of 17.7%. Over 30 years, the minimum annual return increases to nearly 10%, with a maximum of 13.6%. The average returns over these long periods are consistently in the double digits, demonstrating the power of long-term investing.

Timing the Market vs. Staying Invested

Trying to time the market is challenging and often counterproductive. While getting the timing right can be beneficial, it is incredibly difficult to do consistently. Even one wrong move can negate the gains made from previous successful timings. Therefore, it is advisable not to try to time the market. Instead, focus on the long-term trajectory, which historically has been upward.

The Importance of Consistency and Compounding

The story of Warren Buffett is a perfect example of the power of long-term investing. He made 99% of his current wealth after the age of 60, with a compound annual growth rate (CAGR) of around 13% post-tax. This remarkable growth is not due to extraordinarily high returns but rather the power of compounding over a long period. By consistently saving and investing, you can achieve significant wealth over time.

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    Returns are not so important, duration is !