How much Long-Term Wealth has been Built with Equity Investing in the US Stock Market?
This article explores how much return has come from the US stock market using data from the 1870s.
How much Long-Term Wealth has been Built with Equity Investing in the US Stock Market?
Posted on 25 Oct 2023
Author: Sayan Sircar
Tags: 
Research
9 mins read
Research
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This article explores how much return has come from the US stock market using data from the 1870s.
📚 Topics covered:
- Why choose the US stock market for analysis?
- Buy and hold (lump sum) returns
- Rolling returns
- What do we learn from the US stock markets that we can use in India?
Why choose the US stock market for analysis?
The US stock markets is one of the oldest stock markets in the world with two important characteristics:
- the market has given high returns over the last 150 years which makes it interesting for analysis
- data is available for prices, dividends, inflation and interest rates for analysis
For this analysis, we have used data from Prof. Robert Shiller’s website for historical index return. We have data from the 1870s and are using the S&P 500 index, which represents the largest 500 US companies, as a proxy for the US stock market. In all the charts and tables below, we have adjusted the index price returns with dividends and so these are S&P 500 total index returns. We have not adjusted for inflation.
The charts show the same data but we have used a logarithmic scale for the blue graph since the linear scale, in yellow, looks flat for most of the period and will hide the price movement in the early periods.
Buy and hold (lump sum) returns
Average, max and min returns
| Metric | Average | StdDev | Median | Minimum | Maximum |
|---|---|---|---|---|---|
| Any 1Y period | 8.2% | 19.3% | 9.4% | (-64.8%) | 127.7% |
| Any 2Y period | 7.3% | 13.3% | 8.0% | (-52.1%) | 48.0% |
| Any 3Y period | 7.0% | 10.4% | 8.0% | (-43.1%) | 34.9% |
| Any 5Y period | 6.7% | 8.0% | 7.3% | (-21.1%) | 29.1% |
| Any 10Y period | 6.4% | 5.0% | 6.1% | (-8.0%) | 17.0% |
| Any 15Y period | 6.1% | 3.9% | 5.8% | (-4.7%) | 16.4% |
| Any 20Y period | 6.0% | 3.2% | 5.5% | (-2.3%) | 14.7% |
| Any 30Y period | 6.0% | 2.3% | 6.2% | (-0.3%) | 11.0% |
| Any 50Y period | 5.8% | 1.9% | 5.9% | 1.5% | 10.2% |
| Any 75Y period | 5.9% | 1.4% | 5.6% | 3.4% | 8.7% |
Long-term returns
Medium-term returns
Short-term returns
Rolling returns
Constant SIP
Here we analyse the XIRR of a SIP run with a fixed dollar amount being invested.
Average, max and min returns
| Metric | Average | StdDev | Median | Minimum | Maximum |
|---|---|---|---|---|---|
| Any 1Y period | 8.7% | 20.9% | 9.9% | (-72.9%) | 127.5% |
| Any 2Y period | 7.8% | 15.2% | 9.3% | (-64.6%) | 45.8% |
| Any 3Y period | 7.4% | 12.0% | 9.0% | (-59.0%) | 40.8% |
| Any 5Y period | 7.1% | 9.1% | 7.4% | (-45.6%) | 32.9% |
| Any 10Y period | 6.7% | 5.7% | 6.8% | (-19.0%) | 22.4% |
| Any 15Y period | 6.5% | 4.5% | 6.7% | (-9.3%) | 16.6% |
| Any 20Y period | 6.3% | 3.7% | 6.1% | (-5.9%) | 15.5% |
| Any 30Y period | 6.2% | 2.7% | 6.2% | (-2.8%) | 12.6% |
| Any 50Y period | 6.1% | 2.0% | 6.6% | 0.5% | 9.8% |
| Any 75Y period | 6.3% | 1.4% | 5.9% | 3.3% | 8.5% |
There are two main observations here:
- as investment horizon increases, the average (or median return) reduces but risk reduces steadily
- it has taken a long period i.e. more than 30 years, to confidently claim that Dollar Cost Averaging (DCA), which the the US market terminology for SIP, has made money in the US for all investment periods.
Long-term returns
Medium-term returns
Short-term returns
Step-up SIP
Here we analyse the XIRR of a SIP run with a 10% step up (Year 1 = $1,000/month, Year 2 = $1,100/month etc.) every year.
Average, max and min returns
| Metric | Average | StdDev | Median | Minimum | Maximum |
|---|---|---|---|---|---|
| Any 1Y period | 8.7% | 20.9% | 9.9% | (-72.9%) | 127.5% |
| Any 2Y period | 7.8% | 15.2% | 9.3% | (-65.0%) | 46.0% |
| Any 3Y period | 7.4% | 12.1% | 9.1% | (-59.8%) | 41.0% |
| Any 5Y period | 7.1% | 9.3% | 7.5% | (-48.2%) | 33.4% |
| Any 10Y period | 6.8% | 6.0% | 7.1% | (-25.0%) | 23.5% |
| Any 15Y period | 6.6% | 4.9% | 6.9% | (-15.7%) | 17.6% |
| Any 20Y period | 6.4% | 4.1% | 6.6% | (-12.3%) | 16.1% |
| Any 30Y period | 6.3% | 3.2% | 6.4% | (-9.3%) | 13.8% |
| Any 50Y period | 6.4% | 2.6% | 7.2% | (-6.8%) | 11.3% |
| Any 75Y period | 7.1% | 1.5% | 7.5% | 2.7% | 10.2% |
We see here that even a long-term SIP of 50 years, which requires someone to start investing at say age 20 and continue until age 70 does not imply that the will necessarily make money.
Long-term returns
Medium-term returns
Short-term returns
Related:
What is a step-up SIP and how much more wealth does it create vs. a normal SIP?
What do we learn from the US stock markets that we can use in India?
While India had stock markets since the 1930s, we have easily available index data only from the 1970s for which we have SENSEX data. The US market has more than 100 year’s more data and has situations like the Great Depression, two World Wars, 1970s oil shocks etc for which it is difficult to get data for India. The key takeaways are:
- these returns are for the market index. Individual stock portfolios will have given higher or lower returns but on aggregate, the index is the right proxy for the stock market over long periods of time
- the stock market has moved up over time but the returns, irrespective of holding period, has fluctuated within a tight range
- stock markets returns do not have much correlation over investment periods except for the observation that it is more likely to lose money over shorter periods of time
- it is easier, though not guaranteed, to make a positive return as the investment period increases
- the range of returns, both positive and negative, reduces the investment period increases (StdDev column). You can see the same in the charts which become smoother
Related Articles
- What are rolling returns in case of mutual funds? Why is this better than point-to-point returns?
- What are the rolling returns of SIP and lump sum of direct mutual funds? (July 2024 edition)
- Will you always get at least 12% return from mutual funds?
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