There's an oft-repeated investing meme that "historically, the market has returned 12% annually for the last 30 years," but has anyone really done the math recently? That may have been true up until a decade or so ago, but my experience has been drastically different.

I'm a Gen-X'er. I graduated university in May of 1999 and, like a good little investor, immediately started investing 10% of my paycheck for retirement, just like the Wealthy Barber told me to. I figured at a 10% rate of return (again from the Wealthy Barber, and Dave Ramsey), I could easily achieve a comfortable retirement, if I keep a steady pace. A good plan. I patted myself on the back and congratulated myself for doing the smart thing, while my fellow graduates wasted their money and racked up debt.

For the record, in May of 1999, the Dow Jones was in the 10,559 range.

Time went on, I rode the Internet bubble up, then back down, then a couple bull/bear markets since then. The whole time, I didn't worry because I don't need the money for another 25 years. All along, I kept believing the myth that the market will give me an average of 12%. Maybe 10%, pessimistically. With every market plunge, I tell myself, "This is just a chance to buy stocks on sale!" That's what we're supposed to tell ourselves, right?

Fast forward to today. Ten years later. Today, the Dow closed at 10,609. 10,559 to 10,609, over 9.5 years. That's a compound annual growth rate of 0.05%. No, I didn't mess up a decimal there, I didn't mistype and mean to say 5%, I mean the actual rate of return of the Dow over the last decade has been 0.05%. There's no adjustment for inflation in there, that's the real number.

So what's my point? My point is twofold:

1. When will people stop parroting the myth about the market averaging 12% for the last 30 years and update their stat to reflect the last decade of completely stagnant market growth?

2. When will people acknowledge that the era of 12% growth has past? We missed the boat, guys. Our Boomer parents ran everything up to overinflated values so they could cash out their 401(k)'s and leave us holding the bag. Sure, the market may have grown by 12% for the last 30 years (unless you count the last 10), but that does not mean it will ever do so again. Maybe it's time to face the possibility that that was an extremely long, and anomolous period, and we cannot ever expect such growth again. Maybe our working/investing years will be marked by an "optimistic" expectation of 8% returns, instead of the 12% our parents enjoyed (/squandered/wasted/borrowed from their own children).

So what should I do? Just keep drinking the Kool Aid, and keep buying those Total Market Index Funds, I guess. I'll have to re-jig my retirement calculations though to account for 0.05% growth, instead of the 8% I "pessimistically" (LOL!) expected originally.

I agree. Check this out:



Growth is not certain.

Of course, you were unlucky enough to buy in at all-time highs, and suffer through two meltdowns (post 9/11, and this week). So you are feeling it a bit more than someone that bought in a few years after you, or a few years before.

Absolutely. Thanks for posting the chart, by the way. But it's not just me - I believe it's a very large portion of all Gen-X'ers in the same boat. Look at the fantastic market run from 1980 - 2000. I think that gave birth to the mythical "10%" figure. Just in time for our parents (the Boomers) to build up huge portfolios and cash out. Now the Gen-X'ers enter the picture in 2000, and we get nothing. And our parents look at us and say, "What's wrong with you? It's easy. Just put your money into index funds and you'll get 10% over time. It worked for us - you must be doing something wrong." Yet look at the chart from 2000-onward. We're not talking about a little blip here - it's been 7 years since 9/11 and the dot-com bubble bursting. How long are we supposed to wait? Will the next 20 years magically give me 18%, so the preceding decade of 0% will all average out to 12% overall? It's just not realistic. The world has changed.

This is a very, very different investing reality (not to mention job reality, and housing reality) than our parents were dealt.

It's not the Gen Xers that are hurting. We have 30 more years.

It's the Baby Boomers who hadn't started saving early enough, and who were still in equities mostly close to retirement that god badly dinged.

But we can thank our parents for their debt culture that caused this growth stagnation. And then send them a link to GRS.

Referencing the chart, it also appears that there was a period of general stagnation between 1965 and 1980 ... a 15-year time span. I understand your point completely and agree with it on some level ... I began investing in late 2003 and am therefore in a similar situation; however, with retirement so far off, all we can do is ride it out and hope that sometime in the future there will be another prolonged growth period to make it worthwhile.

Actually, it was 1966 thru 1982.

Looking at the entire chart, you can see the tendency for the market to run in roughly 18-year supercycles. I don't think it's any coincidence that that timeframe is also roughly generational. The plateaus between the big runs serve to convince investors that the heyday of the big bull run ups are over and stocks have lost their luster. Note 'Newsweek's late-1979 cover headline "The Death Of Equities" -- the classic "bell ringing at the bottom" if there ever was one -- coupled with CNBC's breathless NASDAQ 5000 stories from 2000.

We appear to be smack-dab in the middle of one of those consolidating, numbing, grinding, stagnant periods now, when viewed from the perspective of the chart. From the inside, it's normal to think and react as you have -- stocks are doomed, our parents ran it up to dizzying heights and we're paying for it, maybe historically it did well but those days are over, etc, etc. From your shorter timeframe, that mindset appears to be accurate. But when seen against a backdrop of history, not so much.

You have a rare opportunity to amass a considerable investment foundation if you make your deposits during these stagnant periods, and stick to your asset allocation model. Rather than buying all the way up, you're going to end up with a relatively low and even cost basis. Once Newsweek publishes that next "Death" headline, and that bell rings, you can hold on for the ride. Remember the 12% isn't an annual interest rate, but an internal rate of return for the overall investment horizon. Some years it's nothing, some years it's going the wrong way. Some years it's REALLY going the wrong way (I'm looking at you 2002 and 2008).

But once it begins going your way, hoo-boy, is that ever fun. I mean REALLY fun.

Widen your time horizon. Gather the nuts for the winter. It seems like it'll never come, but spring will be here sooner than you think. You don't want to say "d'oh, if I had just..." when you look back on it from autumn.

However, you are mssing out a big part of your returns, dividends.

Same mistake others have made, they take what has happened recently and think it is the way things will be forever.

They are also taking a specific 8-10 year period instead of looking at the big picture. You can show virtually any rate of return you want if you alter the period.

Look instead at the long term trend of the graph. Compare it with living standards. You'll find equities are a very good place to invest. That doesn't mean some people get the timing wrong. Most end up just fine.

The market maybe in a slower period but overall I would question the time frame, you're a gen-xer and have a lot of time left for investing. I honestly believe that the markets will come back around and although we're in a downturn over time we'll be back up and you'll start seeing a better return on your investment. You mentioned you invested in the markets for the past 10 years; have you accounted for dividends and DRIPs into your equations?

I too am a Gen-xer and my investments have been doing quite well and although my investments are down I'm still up significantly more than the 0.05% you're quoting.

Yeah, I've done the math, and you're not doing it right. Take the market (and I'd suggest using the S&P 500 rather than the DJIA; I can't imagine why anyone would use a basket of 30 stocks to represent the whole market. At least the S&P 500 covers 70%. I'd recommend the Russell 300 or Wilshire 5000 if they had any kind of history worth looking at) and track it over any 30-year period. If you want, you can include the period that just ended yesterday. Now what do you get? Or you can start with the period of stagnancy that started in 1965. Still coming in below expectation?

The reality is that we came off an unprecedented bull market in 2000. And if there's any lesson we should take from history, it's that markets always revert to the mean. As such, I'd expect the markets to underperform for a few more years before taking off again.

So I'll modify your premise: Anyone who calculates long-term returns based on a 10-year period is an idiot.

it depends on which dates you choose now doesn't it. The long term curve is definitely up, and adding in dividends and compounding, i don't get the argument. diversify and think long term is what the chart indicates one should do.

googoo, You completely miss it, if you extraoplate the right most part of the chart, you will see that within 10 years the DJIA will be at -15,000!!!! Who wants to owe money on all their stock, only idiots want to pay money now for something that will be worth a negative amount baed on the current growth rates of the last year.

Gold is the only salvation, it has gone up ~100% per year the last couple of years.

you pick: In ten years do you want to have million$ of dollar$ in gold , or owe money on your stocks

See the choice is simple... just like going to Zimbawee, everyone there is rich because they are all billionares!!!

Extrapolation doesn't work with markets, as you can plainly see by extrapolating the chart before the recent downturn. How well does that predict reality?



Right and because so many other people have also noticed that gold has increased in value and are rushing to put their money in it, you will now be investing in something that is almost certain to decline in value. You're supposed to buy low, sell high...not the other way around.

The funney thing is people can't tell people whom are being sarcastic from people whom really beleive those things.. Also, I would have pointed out stocks can't go negative.

Ah, that's what emoticons are for.