Stock Market Returns Are Likely to Decline for Buy-and-Hold Investors

Many people begin their retirement saving and investing programs in their mid forties when they have sufficient income. But beneficial outcomes for these investors are not necessarily assured. How much money people make with stocks during their investing lifetime could be determined more by when they are born and the resulting period in which they invest than any other factor. For example, people born in 1935 who began investing around 1980 benefited from a 20-year upside of stock prices. So upon retirement at age 65 these people could have cashed out their investments for huge gains. On the other hand the group of 45-year olds who started investing in 1961 and 1962 barely made money after 20 years because the broad stock market was in a sideways pattern.

The chart of all 20-year holding periods (based on monthly closes from October 1928 through January 1987) for the Dow Jones industrial average (DJIA) shows two major cycles for annualized returns. Note: The annualized return for a given purchase date is computed by converting the 20-year total return to an equivalent annualized return. For example, a 300 percent total return over 20 years becomes a 7.18 percent annualized return.

The first cycle of annualized returns lasted from 1928 through 1961. Annualized returns generally increased for a 20-year holding period for purchases made from late 1929 through early 1942. After the annualized returns peaked, they generally decreased for purchase made from mid 1942 through 1961.

The second major cycle of annualized returns began for purchases made in early 1962 and peaked for purchases made between late 1979 and early 1980. Annualized returns have generally declined for purchases made after 1980.

No one knows for certain where stocks prices and subsequent returns are headed but history suggests that returns are headed down (see red dashed line on chart) for the 20-year buy-and-hold investor. If the current trend of decreasing annualized returns persists, current buy-and-hold investors will see their returns go lower and lower, making it very difficult to make lots of money from stocks. Therefore, people will need to save large amounts of money for their retirement to make up for the shortfall in stock market gains.

To guard against having insufficient money for your retirement, begin an aggressive savings program today.

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Posted March 28, 2007.