Here’s How Important Investment Returns Have Been Historically

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4 min read

Suppose you have a net worth of $0. If you invest $10,000 each year in the S&P 500 and earn 7% investment returns each year, your net worth will grow to $147,836 after 10 years:

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Over this 10 year period, you would have saved a total of $100,000 ($10k each year), which means the other $47,836 came from investment returns.

This means 68% ($100,000 / $147,836) of your net worth would have come from savings and 32% would have come from investment returns.

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This example assumes you earn 7% investment returns each year. In reality, S&P 500 returns can fluctuate wildly from one year to the next. 

To see how important investment returns have been historically, I went back and looked at actual market returns since 1928.

10-Year Investment Periods

The chart below shows how much of your net worth would have been composed of savings compared to investment returns for every 10-year period since 1928. It assumes you start with a net worth of $0 and invest the same amount each year exclusively in the S&P 500. 

NOTE: The amount invested each year is irrelevant since we’re only concerned with percentages, not dollar amounts. The percentages are the same whether you were to invest $10,000 or $100,000 each year.
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Some interesting observations:

During the two worst 10-year investment periods (1965-1974 and 1999-2008), savings actually accounted for 100% of net worth.

Even during the best 10-year investment periods, savings still accounted for 31% of net worth. 

Savings accounted for 61% of net worth, on average, among all 10-year periods.

20-Year Investment Periods

Now let’s take a look at all 20-year periods, using the same assumptions as before:

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Some interesting observations:

During the worst 20-year investment period (1955-1974), savings accounted for 74% of net worth.

During the best 20-year investment period (1980 – 1999), savings only accounted for 17% of net worth. 

Savings accounted for 39% of net worth, on average, among all 20-year periods.

30-Year Investment Periods

Lastly, here’s a look at all 30-year periods since 1928:

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Some interesting observations:

During the worst 30-year investment period (1952-1981), savings accounted for 32% of net worth.

During the best 30-year investment period (1970 – 1999), savings only accounted for 10% of net worth. 

Savings accounted for 22% of net worth, on average, among all 30-year periods.

Summary

It’s pretty insane how much investment returns can fluctuate during 10-year periods. During a period like 1999 – 2008, you would have received no help from the stock market in pushing your net worth higher.

Contrast that with a period like 1990 to 1999, where investment returns accounted for a mind-boggling 69% of your net worth.

While this might seem alarming for those of us who are trying to go from $0 to retirement in 10 years or less, keep in mind that a high savings rate is more important than spectacular investment returns in the short-term.

For example, someone who saves $30k per year earning 0% annual returns will have a higher net worth after 10 years than someone who saves only $15k per year earning 10% annual returns.

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For anyone trying to go from $0 to retirement in 10 years or less, savings is far more important than investment returns. If your savings rate is high enough, a poor decade of returns won’t crush you. And if you do catch a great decade of returns, that’s just icing on the cake.

Notice, however, how investment returns account for a higher percentage of net worth during 20-30 year time horizons. This is because compound interest becomes incredibly powerful when given this amount of time to do its work.

While savings rate is a powerful tool in the short-term, compound interest is a beast in the long-term. 

Nerd Notes: S&P 500 annual returns used for this post can be found here. Annual inflation rates used for this post can be found here.

Zach

Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.

Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.

Although the bulk of his net worth is invested in index funds, his favorite place to invest in individual stocks is M1 Finance, a site that allows you to build a custom portfolio of stocks for free.

His favorite way to save money each month on his recurring bills is by using Trim, a free financial app that negotiates lower cable, internet, and phone bills with any provider on your behalf.

His favorite micro-investing app is Acorns, a free financial app that takes just 5 minutes to set up and allows you to invest your spare change in a diversified portfolio.

His favorite place to find new personal finance articles to read is Collecting Wisdom, a site that collects the best personal finance articles floating around the web on a daily basis.

Zach

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Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

4 Replies to “Here’s How Important Investment Returns Have Been Historically”

    1. Thanks, Mrs. Farmhouse Finance 🙂 It is super interesting how different time periods have such different results. The main theme holds true that saving is the key to short-term wealth growth and compound interest is the key for long-term growth.

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