Long Term Stock Returns Depends On When You Start

By Lancer Roberts, StreetTalk Advisors

My friend Cullen Roche recently posted a note entitle “The Long View On Stocks” which discussed a recent research note out of BofAML on the long term returns of stocks since 1824.  The core point of the analysis was that if someone would have invested just $1 in 1824 it would be worth $4,225,000 today with dividends reinvested.  The piece went on to note the major secular bull market returns but failed to not the secular bear returns.   Cullen picked up on the key issue with this analysis, which I have consistently railed against for the last decade, by jokingly stating:

“Now, if we could only solve that whole, not being alive for 189 years, problem…..”

Cullen is absolutely right.  The problem with all of these “invest for the long term” analysis is that it assumes that you will live forever.  Unfortunately, cloning, freezing, stasis, DNA manipulation. Robotics or vampirism have not yet provided viable solutions to immortality.  For most individuals the reality is that by the time that they achieve a level of income and stability to begin actually saving and investing for retirement – they have, on average, about 40 years of investible time horizon before they expire.

When considering the impact of 15-18 year secular market cycles, as shown in the chart below, it really becomes much more important in determining the “WHEN” to invest as much as “WHAT” to invest in.



I have prepared two different charts to show you the impact of investing revolving around 40 year time spans.  I used an initial investment of $1000 at the beginning of each decade and analyzed the capital appreciation for the ensuing 40 year period.  In this regard we can garner a clearer picture about the impact of both secular bull and bear market cycles on the total investment returns.  [Note:  The data below uses Shiller's price data on a nominal basis and is based on monthly capital appreciation only.]

The first chart shows the average annual return for each starting decade.

40-year-avg-return (1)


The next chart shows the capital appreciation of a $1000 initial investment.

40-year-capital-appreciation (1)


As you can see it makes a huge difference on the ending result depending on “WHEN” you start.  If you started investing during the 50’s and 60’s then you were lucky enough to capture the raging “bull market” of the 80’s and 90’s which offset the secular bear market of the 70’s.  However, if it started in 1990, so far, results haven’t been all that great as the secular bear market of the 21st century has slowly chipped away at the gains of the 90’s.

One very important thing to be noted here, which I have discussed in the past, is that valuations have been a key driver of these 40 year cycles.  The best 40 year returns came from when the starting point in valuations were below 10x trailing reported earnings.  Today, at over 19x trailing reported earnings (the only valuation measure that is historically consistent),it suggests that the next 40 years will produce substandard rates of return.

Of course, it really just depends on how long you think you will live.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Lance Roberts

Lance Roberts

Lance Roberts is the CEO of STA Wealth Managment. The mission of STA Wealth Managment is simple - lead our clients to financial success by actively managing their assets while limiting risk to capture returns. Through the utilization of economic and technical analysis, historical research, and risk controls, we build portfolios which will create long-term investment results.

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  • http://expectingreturns.com/ CF

    Nice post, Lance. I think one interesting point about investing for the long-run is that we (both pros and amateurs) are useless at consistently timing the market. Taking a long run view reduces the chances that you’ll buy high and sell low.

    Two things that would be useful to see in the context of this post are:
    (1) A frequency distribution for 1, 2, 5, 10 and 40 year holding periods (with, say, rolling weekly/monthly data); then comparing the first four moments of the each distribution
    (2) Take this and overlay the trailing PE ratio and investigate the predictive power of the valuations.

  • Nils

    Still very far from the life reality of any average saver.

  • Nostradamus

    Buffett did start at a good time for a long term investor.

  • http://www.basonasset.com James Osborne

    Nice job Lance, this is a good view of the long-term. However, it’s not very representative of any person’s actual investment experience. No one (that I’ve ever met) invests all of their money at once, into a single asset class, and never touches it again. People spend 20-30 years accumulating wealth, then 30+ years reducing equity exposure through spending and allocation changes. A much more complicated time series than what is presented here.
    It would be difficult, but very interesting to see rolling period averages of high equity exposure/smaller dollar amounts to falling equity exposure as individuals age and become more risk-averse.
    – James

  • Aaron

    It’s emotionally difficult but best over the long term to buy into a drawdown. That goes for stocks, bonds, real estate, commodities, investing/trading strategies etc. IF you believe that the long term will be up, then it makes the most sense to wait for it to suck, then buy in. Buy bonds when interest rates are 10%, buy stocks after 20-30%+ corrections, buy emerging markets after a crisis, momentum after it’s been killed, value investing when all the value funds are closing up shop. It’s hard, but your account will thank you.

  • Suvy

    I’m relatively new to this stuff, but to me, it seems asset prices are basically driven by leverage. So if you can track the way that international capital is moving across borders, you can see exactly how equities in different countries can move.

  • Suvy

    I have doubts that Buffett did the same thing now that he did when he was 20-25. I just don’t buy it.