I've heard from more than one person lately that the stock markets have not done well since 11 September 2001, that they're afraid of investing in stocks because of the risk of another terrorist attack on the United States, and so on. I certainly wouldn't want to advise anyone to invest in an instrument that they're not comfortable with. However, when I hear such blanket assertions made about the stock market or baseball statistics, I wonder what the numbers really say, and decide to look it up.
I'm going with the most-recognized US market index, the Dow Jones Industrial Average.
10 September 2001 Close: 9605.85
18 September 2007 Close: 13739.39
Cumulative Annual Growth Rate Over this Period: 6.12%
I used the handy Excel XIRR function to compute this value. I don't think I've been able to compute this kind of math on my own since I was 18.
But what do the numbers show? What should the reader think of a 6.12% annual growth rate? Well, it is lower that the supposed long-term historic average. But on the other hand, I don't think it should be considered dismal. It seems within the expected historic range for a 6-year period, though I am not checking it against 6-year rolling returns. Maybe when my kids are a little older, I can give them assignments like this.
If you want to guarantee a better return than 6%, well, let me know how that can be done.
1 comment:
An annual return of 6% seems decent to me. The formula I use for annual return is:
AR = ln(CV / BV) / Y
where AR is the annual return; CV is the current value; BV is the base value, i.e. the value at the beginning of the time period you're interested in; and Y is the number of years since the beginning of the time period. In your example:
AR = ln(13739.39 / 9605.85) / 6.019178 = 5.95%
This is the continuously compounded interest formula, which is apparently different from XIRR.
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