The Ten-Year Annualized Returns Roller Coaster
February 7, 2009

 See the more recent data here and here. 

Note: Yesterday the NY Times featured a chart of S&P 500 total returns since the late 1930s with recessions highlighted. Let's extend the analysis back to 1880 by adding recessions to one of the charts featured below. The slight differences in return values from the NYT chart reflect our use of monthly averages of daily closes for calculations.
Here's a sobering chart, one that will especially resonate with those of us who follow economic cycles.

Imagine that ten years ago you made a single, lump-sum investment in the S&P 500. How much would it be worth today, excluding dividends and adjusted for inflation? Brace yourself: Your investment lost 43% for an annualized return of minus 5.4%.

Now let's imagine that we time-travel back to September 2000 and pose the same question. Your ten-year holding would have had an inflation-adjusted gain of 255% for an annualized return of 14%.

Studying the inflation-adjusted (real) data is the best way to understand the true value of investment returns over long periods of time when inflation has undergone radical changes. The contours of the real data more closely resemble the secular bull/bear tops and bottoms since the late 1800s as described in Robert Shiller's Irrational Exuberance and Russell Napier's Anatomy of the Bear.

But for those who insist on seeing the same chart in nominal terms, here it is. With no inflation adjustment, your investment lost a mere 26% for an annualized return of minus 3%.

The same time-travel back to September 2000 would have given you a ten-year inflation-pumped gain of 365% for an annualized return of approximately 17%.

Of course, the average person thinks of returns exclusively in nominal terms. Those unprecedented returns at the turn of the 21st century had fooled most investors into unrealistic expectations for future market performance.

But what if you reinvested dividends?

Here are the same two charts (real and nominal), this time with dividends reinvested. The difference is obvious, but in the past couple of decades, the dividend advantage has diminished. For the ten-year period ending in December 2008, dividend reinvestment accounted for an annualized difference of only 1.6% (that's 1.57% for real returns and 1.61% for nominal returns).

A Look at S&P Composite and 10-Year Annualized Returns Together

Finally, here is a chart that overlays the dividend-reinvested 10-year annualized return with the real (inflation-adjusted) S&P Composite.

For those of you who follow the ShadowStats.com alternate CPI (which I track here), I've also provided a variant chart overlay with the alternate CPI adjustment.

Those familiar with the ShadowStats.com method of inflation adjustment will probably not be surprised to learn that the current 10-year annualized (alternate-CPI-adjusted) real return with dividends reinvested almost hit a negative 10% at the end of 2008.