Can you really make 10% returns yearly?

by big_deal

8-10% is an accurate historical average rate of return on equities (stocks) over the long term. However, here are some very critical qualifications on these returns:

  1. These values are nominal total returns over a period of time with higher average inflation rate, higher average dividend rate, and lower company valuations. The expected returns over the next 5-10 years based on historical data and current inflation, dividends, and valuation are -1% to +7% over the next 10 years.
  2. Over very long time horizons (a lifetime) average stocks returns might be considered low risk. Short term returns are not low risk. Returns have very large variance from the average over shorter time periods. In fact, single year returns in the range of 8-10% are relatively rare. Most years the returns are closer to +20% or -20%. 5 year periods of negative average returns and drawdowns of 20-30% are not uncommon. US large caps have lost 50-60% a couple of times. International markets have lost 90%. 8-10% is just the long term average of good and bad years with much more extreme levels of return. If you happen to begin investing at the start of a recession or bear market it won’t feel low risk at all! But honestly it’s usually the best time to start purchasing shares at relatively inexpensive prices.
  3. The volatility in pricing gives a slight advantage to investors who are accumulating shares (adding money to a portfolio) and a severe penalty to those who are liquidating shares (retirees living off a portfolio). The slight benefit to accumulators is usually termed ‘dollar cost averaging’. The severe penalty to deccumulators is called ‘sequence of return risk’ and is often linked to the term ‘safe withdrawal rate’. The mathematical reality is that a portfolio can only be expected to provide a regular income stream of ~4% of the portfolio value. Even though the long term average return is closer to 8%, the volatility reduces the feasible regular income stream down by about half.

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