Average Long Term Returns vs. Compound Annual Growth Rate

The next time your financial planner talks to you about the long term average return on your retirement nest egg suggest he uses the Compound Annual Growth Rate instead.

The Average return is what’s known as the simple average according to the moneychimp website. This is a great little site to help you understand what the real return on your money over the long term might have beenimage if you had invested all your nest egg in the S&P 500.

There is a calculator there that lets you compare the wealth managers “flawed” average return with the true average return, the CAGR.

As they say on the site,

“Volatile investments are frequently stated in terms of the simple average, rather than the CAGR that you actually get. (Bad news: the CAGR is smaller.)”

They go on to say,

CAGR of the Stock Market

This calculator lets you find the annualized growth rate of the S&P 500 over the date range you specify; you’ll find that the CAGR is usually about a percent or two less than the simple average.”

And they state that,

“The most significant pattern is this:

Over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent.”

(My words  here – I think the very long run refers to the period from 1871 to 2008. You should live so long!) 20 years really is a short run in comparison.

In the above graphic of the calculator I have done calculations for the 10 year (often used by wealth managers to justify their buy and hold strategies to hold onto your money) for the period Jan 1 1999 to Dec 21 2008. As you cans see the CAGR is -.20% whilst the “average return” used by fund managers shows it to be 1.94%.

It’s not just find managers and financial planners that use this flawed system. It is bank economists and even financial gurus who should know better.

Most often the financial industry tells us we have to invest for at least 5 years to expect returns. So I thought I might do a table on investing $1 in the S&P500 over 5, 10 and 20 years. First going back from Dec 31 2008 the latest figures on the web site.

These figures are adjusted for inflation according to moneychimp.com

Date Range (Jan 1 XX to Dec 31 XX Period Years Average Return % Annualized Return
True CAGR %
Standard Deviation
$1.00 Grew to:
2004 – 2008 5 -2.85 -4.73 17.40 0.78
1999 – 2008 10 -1.97 -3.83 18.39 0.68
1989 – 2008 20 7.11 5.30 18.70 2.81

These figures are NOT adjusted for inflation.

Date Range (Jan 1 XX to Dec 31 XX Period Years Average Return % Annualized Return
True CAGR %
Standard Deviation
$1.00 Grew to:
2004 – 2008 5 -0.06 -2.19 18.66 0.90
1999 – 2008 10 0.60 -1.40 19.17 0.87
1989 – 2008 20 10.16 8.27 19.26 4.90

So we can see that over the 20 years to Dec 31 2008 the long term average return on the S&P500 adjusted for inflation was 7.11%. But the Annualized True CAGR was 5.30%. In fact these returns are not too bad as $1.00 invested on Jan1 1989 grew to $2.81 in today’s dollars.

However that is a “range in time”. It is as if I timed the market. If you had $100,000 in your nest egg on Jan 1 1989 it would be worth $281,000 in today’s dollars on Dec 31 2008.

Ignoring inflation, which is what your financial planner will most likely do, we see that the average long term returns are 10.16% (That is close to the figure I kept hearing from them). They will tell you that your $100,000 invested in 1989 would have grown to $490,000.

Unfortunately over the last 10 years your investments didn’t earn any returns for you. How long was your financial planner going to keep your retirement nest egg in the “buy and hold” strategy that gave you no returns? Maybe this bear market will actually help you and get your financially planner motivated to learn how to protect your nest egg going forward.

Below is another table of investing $1 in the S&P500 going forward each year from 1971 for 20 years until Dec31 2008. The figures are adjusted for Inflation.

Date Range (Jan 1 XX to Dec 31 XX Average Return % Annualized Return
True CAGR %
Standard Deviation
$1.00 Grew to:
1971 – 1990 5.74 4.32 16.46 2.33
1972 – 1991 6.52 5.01 17.02 2.66
1973 – 1992 6.00 4.51 16.92 2.42
1974 – 1993 7.43 6.14 15.71 3.29
1975 – 1994 9.06 8.30 12.71 4.93
1976 – 1995 9.35 8.54 13.19 5.15
1977 – 1996 9.40 8.59 13.22 5.20
1978 – 1997 11.60 10.84 12.94 7.84
1979 – 1998 13.05 12.29 12.88 10.15
1980 – 1999 13.73 12.98 12.75 11.48
1981 – 2000 12.29 11.40 13.90 8.66
1982 – 2001 12.27 11.37 13.94 8.62
1983 – 2002 10.29 9.06 15.96 5.67
1984 – 2003 10.70 9.43 16.24 6.06
1985 – 2004 10.97 9.71 16.14 6.38
1986 – 2005 9.72 8.51 15.87 5.12
1987 – 2006 9.49 8.30 15.80 4.92
1988 – 2007 9.50 8.31 15.79 4.93
1989 – 2008 7.11 5.30 18.70 2.81

If you had retired on Dec 31 2007 and taken your money out of the S&P500 and put it in “safe” assets like bonds and term deposits you would have had $493,000 based on an original investment of $100,000 in 1989. (I’m not saying you should do this, but you should significantly reduce your exposure to stocks well before retirement in my view, unless you can put a risk strategy in place to avoid large losses (Rule#1).

On paper you got a reasonable long term true CAGR of 5.3% over the 20 years 1989 to 2008. However if you had retired on Dec 31 2008 your retirement nest egg would have been reduced to only $281,000. That is a reduction of 43% 🙁 These are inflation adjusted dollars too. So in the last twelve month you would have lost $212,000 of your nest egg. If you were to draw down your nest egg using the 4% rule, that is equivalent to losing 10.75 years worth of retirement income (not accounting for inflation in this case).

Notice two things about the table too. First the “dollar” returns have been decreasing in real terms since 1999 when $1.00 invested in 1980 would have been worth $11.48 in 1999 adjusted for inflation.  On Dec 31 2007 $1.00 invested in 1988 would have given you only $4.93. That’s along way from the $11.48 in 1999.

Second the volatility has been increasing with the standard deviation in yearly returns being as high as 18.70%. That means increased volatility and therefore increased risk when investing in the stock market.

So investing for the long term since 1980 has resulted in increased volatility and decreasing returns. There has been more risk over the long term – not less. In fact it has increased by 32%.

Your financial planner should have had these figures and used them to adjust your investment strategy. But the wealth management industry has chosen not to act on them to protect your nest egg. Why?

As far as I can tell, investment strategies have not changed even after the stock market crash. Will they never learn or do they believe you can be fooled again?

The advice from the financial investment world is “Don’t Panic”. They say if you have a long term strategy in place you should stick to it. Look at the figures and I think you will agree the long term strategy broke down in 1999.

For the last 10 years you got NO RETURNS – just when you really needed them as you got close to or went into retirement. Then as if to rub salt in the wound they failed to protect even your capital (as there were no returns) from the bear market. “Good one” wealth managers!

4 Responses to “Average Long Term Returns vs. Compound Annual Growth Rate”

  1. admin says:

    I should have used the title Long Term Investing is Very Risky rather than the title I have used.

    GregI a subscriber, offered the following comment and sent me an article called “Strategies: Now the Long Run Looks Riskier Too”

    Read it here-



    People from the financial industry take the position that market data is normally distributed which is totally wrong.Its either because they are ignorant,self serving,intellectually lazy &/or all of the above.People deem to like looking @ Normal distributions but the fact is they hardly exist outside tightly constrained data sets.

    I have a reasonably good background in statistics & always have a good a laugh when someone tries to lecture me on this.Market data lacks stationarity & has multiple interactions which results in kutosis of statistical distributions which means that market data can never be normally distributed.

    One of the better laymans explanations of the stupidity of analyzing market data on a normal distribution basis is provided in Harry S Dents latest book “The Great Depression Ahead” which I’d strongly recommend as a read.

    While I don’t necessarily agree with all his positions,he has some good data & insights/perspectives.



  2. admin says:

    Some further comments emailed to me by GregI and posted with his permission.


    I just read your blog on this & there are many good points you made .
    The situation is actually worse because of the assumption of perfect indexing which is not achievable as its impacted by stock selection as well as stock/company failures & exits & entrants to the index.

    Interestingly the ASX 200 a couple of weeks ago was showing a ZERO 10 year return.
    If you are an investor who wanted to eliminate risk of fund manager stock selection & bought the ASX 200 index under his “financial advisers'” direction from say State St, add the cost of indexing (MRR say ~.3 %) and add the cost of the “adviser”
    @ say 1.0% (a low cost one ?),then you have very roughly a compound growth
    (CAGR) rate of ~ -1.3% PA over the decade.
    I know…you really should recalculate quarterly ,allow for dividends and tax but the trend’s clear.

    Pay 15% tax on income + tax on capital gains if its in a superfund accumulation phase or the marginal tax rate if its in your name or a trust etc & if it’s a Superfund in pension phase there’s no tax but but because you’re withdrawing there are other negative impacts as people are finding out with the latest declines.

    And then you have to allow for that delightful item called inflation !!!

    Not a pretty sight for the average investor.


  3. […] I hope they are sharing this with their friends and in some cases their clients.  I also recommend Average Long Term Returns vs. Compound Annual Growth Rate and Mutual Fund Return Lies: Average Annual Return vs Compound Annual Growth Rate which both help […]

  4. admin says:

    I checked your blog and find you have some good posts on these topics.

    I have added the link below for those who might want to read the “Mutual Fund Lies” Post


    Thanks for your comment and support

    David Bates

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