The most widely followed index in the United States is the S&P 500. It contains 500 of the largest companies in the country and its value can be an indication of how well the economy is doing as a whole.
An individual investor can invest in the stock market directly with a simple buy and hold strategy, one even advocated by the famous billionaire investor Warren Buffet.
Buying and holding an index fund that tracks the growth of the stock market is a time tested way of increasing returns on a portfolio. It is one that is cost effective and becomes more effective the longer an investor is in the market.
For example in the last 50 years, an investor investing over a 10 year time horizon generated a positive annual return rate 91% of the time. Investors in the early 1970s and early 1990s saw annual returns in the ~10% and ~6% range respectively.
A 10 year time horizon still generates a wide range of returns and even generates negative returns in some years. Recessions that last the better part of a decade would cause this. The dot com crash in the early 2000s are some of the years in the negative part of this chart.
If the investment time horizon is increased to 30 years the story is very different.
Now the returns are all in the positive. There hasn’t been a 30 year period in the last 60 years of the S&P 500 that has generated a negative compounded annual rate of return. It is interesting to see the rate of return is higher in the 1970s and 1980s than in the 1950s and 1960s. The investment period in the 1970s would have ended in the 2000s, a decade which saw a great boost to the economy from to technological improvements like the modern computer and the internet.
These charts show the long term effects of the buying and holding in the stock market and how increasing investment horizons can greatly improve returns on your portfolio. Thanks Warren!
The rate of return was calculated using the compounded annual growth rate (CAGR) of the the S&P 500 starting on every month from 1950 to 2018, looking a 10-year and 30-year time horizons. Each occurrence of the rate of returns were plotted on graphs to show the distributions.