Before I even begin, here are some findings (I use the CRSP return database which starts January 1, 1926 and runs through December 31, 2010):
- Earning 20%+ returns over very long horizons is for all intent and purposes virtually IMPOSSIBLE (assuming the market experience of the past ~90 years is representative of the future).
- 31.5%+ returns over the 1926 to 2010 period imply that an investor will end up owning over half of the ENTIRE stock market.
- 33%+ returns imply that an investor will end up owning the ENTIRE STOCK MARKET!
- A 40% return will have you owning the entire stock market in ~60 years–not a bad retirement plan!
- A “doable” 21.5% a year implies an investor will own .62241% of the market at the end of 2010. With a $16.4 trillion total market value as of December 31, 2010, this would imply a personal stock portfolio worth $102 billion!!!
- Warren Buffett–and perhaps a very select handful of others–have been able to achieve 20%+ returns over very long time periods. These individuals represent some of the richest people on the planet because of this very phenomenon.
- An investor might have an epic run of 20% returns for 5, 10, maybe even 15, or 20 years, but as an investor’s capital base grows exponentially, the capital base slowly becomes ALL capital, and all capital cannot outperform itself!
It’s not impossible to beat the market, but it’s important for investors to maintain reasonable and rational expectations. Beating the market takes an extraordinary effort, intellect, approach and a little luck never hurt.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.