Compound Annual Growth Rate of S&P

RoR? “Rate of Return” or Compound Annual Growth Rate (CAGR)

Bottom Line:

From 1900 through 2015, the S&P 500 (the “stock market”) has had a compound annual growth rate of 9.7%.  That compares to the simple average of 11.53% which is more often reported.

Post Great Depression:

If the evaluation period starts AFTER the great depression (1939 – 1933), then the CAGR is 11.18%! (12.86% simple average).

Proof:

The calculator accessible from THIS LINK  lets you find the Compound Annual Growth Rate  (or Rate of Return) of the S&P 500 over any date range you specify.

Explanation:

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year. The CAGR is usually about a percent or two less than the simple average. It is the simple average that is almost always presented in any presentation of “performance”.

A problem with talking about “simple” average investment returns is that there is ambiguity about what “average” means. For example, an investment that went up 100% one year and then came down 50% the next, is NOT an average return of 25% = (100% – 50%)/2, because the principal is back where it started: the real annualized gain is zero.

In this example, the 25% is the simple average, or “arithmetic mean”. The zero percent that you really got is the  “annualized return”, or the CAGR for Compound Annual Growth Rate.

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.)

 

 

Inflation:

The above numbers include inflation. To see how the S&P REALLY did, we must remove inflation from the calculation. When inflation is taken into consideration, the S&P, from 1900 through 2015 had a compound annual growth rate of 6.53%. That’s pretty good.

While stocks have  beaten inflation over the long run, they’ve done poorly within the high-inflation periods themselves: try the inflation-adjusted returns for 1916-1918, 1946-1947, and 1973-1981.