Observations: Best & Worst Stock Market Returns for 1-100 Years

Friday, May 8, 2009

Best & Worst Stock Market Returns for 1-100 Years

In my stock market database, the longer the holding period, the smaller the gap has been between the best and worst annual percentage return. However, the graph below may not mean what you think it means.
In recent posts, we have looked at stock market performance over rolling 5, 10, 20 and 50-year periods on a more or less stand-alone basis. However, it also makes sense to look at these returns as a group -- as a series. What can we learn by analyzing differences in performance as we go from 1 to 100 years? The most obvious place to start is with the range of returns.

Chart of Range of Stock Market (Dow) Returns Over 1 to 100-Year Periods

Chart showing best & worst stock market (Dow Jones Index) returns in history for 1-100 years

Range of Stock Market (Dow) Returns

The graph above (click to expand) shows the best, worst and average DJIA (Dow Jones Industrial Average) annual returns for holding periods ranging from one year to 100 years. The assumption is that
the investor bought at the beginning of the holding period and sold at the end, re-investing dividends in the interim. The minimum, maximum and average shown are annualized returns for the entire holding period, not for individual years within the holding period. The data used is year-end data starting around 1900 and going through 2012.

Best and Worst Stock Market (Dow) Returns

The graph shows that the maximum gain was greater than the maximum loss for all holding periods. For example, the first bar shows that the best one-year return was around 95%; the worst was a loss of approximately 48%. However, this difference is somewhat misleading since, for example, it takes a 100% gain to recover from a 50% loss. The second bar shows that the best compound annual growth rate for the more than 100 two-year periods was about 45% per year; the worst was a loss of a little less than 40% per year. The final "bar" on the right summarizes the results of the ten 100-year periods, the most recent being from 1913 through 2012. (Note: The rolling return series mentioned at the top of this post includes graphs of all the returns for each holding period -- not just the minimum and maximum.)

As you might have expected, as the length of the holding period increases, the maximum compound annual return decreases; the minimum annual return increases. By the time we get to the 100-year returns, the range (9.4% to 10.3%) is too small to be visible in the chart. Therefore, the longer the holding period, the less likely it has been that investors experienced a loss for the full holding period. Investors who held for 1-3 years frequently experienced an overall loss; however, investors who held for just 5 years experienced an overall loss less than 10% of the time. Less than 1% of the 10-year holding periods resulted in an overall loss; holding periods of 20 years or longer never resulted in an overall loss. Reminder -- these are nominal returns; negative real returns were more frequent. (See this post for a discussion of nominal vs real returns.)

Average Stock Market (Dow) Returns

The average return starts at 11.8% for the one-year returns, drops rather sharply to 10.5% for the two-year periods, and then declines gradually to 9.8% for the 100-year periods. Historically, the longer the holding period the less likely it was to end with the investor losing money, and, the closer the return has been to the long-term average of around 10%. In fact, the maximum, minimum and average returns are all converging toward the long-term average return.

Based on this history, it appears that readers who are planning to buy and hold for 100 years or more are "assured" of performance very close to the long-term average return of around 10% per year -- regardless of when they buy. For those of us holding for shorter periods, there is a significant difference between the minimum and maximum annual rates of return that gets smaller the longer we hold.

WARNING! It's Easy to Misinterpret This Chart!

The fact that the annual rates of return converge makes it easy to assume that the dollar outcomes are also converging. For example, the average return for 50 years is about 10%. Ten thousand dollars invested at 10% for 50 years is about $1,170,000. Therefore, it is easy to assume that at 50 years the range of ending portfolio values is clustered pretty tightly around $1,170,000. This is decidedly NOT the case! In fact, the difference between the best and worst 50-year outcomes is more than $3,000,000. This is a critical issue if you are investing for retirement. To see why this is true, see Range of Stock Market Returns in Dollars.

A Follow-Up Question

An obvious question is, "What factors determine whether we are more likely to experience returns closer to the top than the bottom of the range?" For at least a partial answer to that question, see Dow Price/Earnings Ratio Impact on Future Returns, or Rolling Returns vs. P/E Ratios.

Note: The above chart is based on DJIA (Dow Jones Industrial Average) data from my Stock Market Analysis Model. Results would be essentially the same if we used S&P 500 data. Dow dividends prior to 1929 have been estimated based upon another stock market index.