What if you invested in the S&P500 for 30 years and did nothing?

The expected return of the US stock market

The internet is full of retirement calculators that take a stab at guessing your net worth in 30 years.  You plug in a few parameters - your investable assets, how much you contribute to your savings, the expected return of your investments - and out pops some number that is either relieving or absolutely terrifying.  

But what is the expected return of your investments? Often you'll see 7% thrown around, but that number hardly seems certain. What if you had invested everything right before the great depression? Or right before Black Monday in the 80s?  Let's take a closer look.

30 year CAGR of the S&P500

Time is your friend.  This chart shows the compound annual growth rate (CAGR) of a 30 year investment in the S&P500 by starting year, with inflation taken into account and with dividends reinvested.  For example, in 1940 the CAGR value is 8.39%, meaning that between 1940 and 1970 the S&P500 returned 8.39% on average.

Here are some quick observations before we delve a little deeper:

  • Even investors who went all in before severe market downturns were able to return ~5% annually over 30 years
  • The best year to invest was 1932, the bottom of the Great Gepression, where investors returned 10.56% annually over the next 30 years
  • The worst year to invest was 1965, just before the Vietnam War and the inflation spike of the 80s, where investors returned just 4.36% annually over the next 30 years

Average return & variance

The results above map on pretty well to a normal distribution.  The average CAGR works out to 7.20%, with a standard deviation of 1.54%.  Roughly speaking, this means two times out of three you can expect an investment in the S&P500 to return between 5.7% and 8.7% over a 30 year time period.

Conclusions

This little experiment should give you a better idea of the expected return of your investments, but it has some limitations.  For starters, if you're investing in the S&P500 through ETFs you'll need to remove about ~0.10% from your expected return in management fees, and another ~0.30% in withholding taxes if you're Canadian (provided you're trading outside an RRSP or other retirement account recognized by the US).

All in all I'd recommend trying the following numbers when playing around with a retirement calculator:

  • Very conservative: 4% CAGR
  • Conservative: 5.5% CAGR
  • Neutral: 6.5%
  • Optimistic: 7.5% CAGR
  • Very optimistic: 9% CAGR