Simulated and plotted investing in the entire S&P since 1871: How you'd make out for every possible 40-year period if you buy and hold.
Adam Rifkin stashed this in Investing
Includes inflation and re-invested dividends.
Explanation of the above chart by the author:
Note that this data is from Robert Shiller's work. An up-to-date repository is kept at this link. Up next, I'll probably find some bond data and see if I can simulate a three-fund portfolio or something. But for now, enjoy some visuals based around the stock market:
The plots above were generated based on past returns in the S&P. So at Year 1, we take every point on the S&P curve, look at every point on the S&P that's one year ahead, add in dividends and subtract inflation, and record all points as a relative gain or loss for Year 1. Then we do the same thing for Year 2. Then Year 3. And so on, ad nauseum. The program took a couple hours to finish crunching all the numbers.
In short, for the plots above: If you invest for X years, you have a distribution of Y possible returns, based on previous history.
Some of the worst market downturns are also represented here, like the Great Depression, the 1970s recession, Black Monday, the Dot-Com Bubble, the 2008 Financial Crisis. But note how they completely recover to turn a profit after some more time in the market. Here's the list of years you can invest, and still be down. Take note that some of these years cover the same eras:
- Down after 10 years (11.8% chance historically): 1908 1909 1910 1911 1912 1929 1930 1936 1937 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1998 1999 2000 2001
- Down after 15 years (4.73% chance historically): 1905 1906 1907 1929 1964 1965 1966 1967 1968 1969
- Down after 20 years (0.0664% chance historically): 1901
- Down after 25 years (0% chance historically): none
Note that this stock market simulation assumes a portfolio that is invested in 100% US Stocks. While a lot of the results show that 100% Stocks can generate an impressive return, this is not an ideal portfolio.
A portfolio should be diversified with a good mix of US Stocks, International Stocks, and Bonds. This diversification helps to hedge against market swings, and will help the investor to optimize returns on their investment with lower risk than this visual demonstrates. This is especially true closer to retirement age.
In addition to this, this curve only looks at one lump sum of initial investing. A typical investor will not have the capital to employ a single lump sum as a basis for a long-term investment, and will instead rely on dollar cost averaging, where cash is deposited across multiple years (which helps to smooth out the curve as well).
If you want the code used to generate, sort, and display this data, I have made this entire project open-source here.
Award-winning forecaster Martin Armstring talks about the problem of developing prediction algorithms using insufficiently long historical windows. Zoom out just a bit bast the window used above, to a 200 or 300 year window. *Now* you'll have zero historical examples of a democracy surviving such a period at all, and perhaps 1 historical example of a fiat currency lasting as long without collapsing.
Fair enough but 200 years out I will be long dead.
I'm trying to figure out what to do with money now so I can afford to be alive when I'm 75 if I make it that far.