July 23rd, 2016

A CAGR Debate

An interesting recent article that appeared in MarketWatch had as introduction:

"Consider: The 30-year annualized return for the S&P 500 average was 10.35% through 2015, but the average investor in the U.S. market pocketed just 3.66%, according to an analysis of investors by researcher Dalbar Inc."

We read this, understand and accept the numbers, but we just pass on with some comment approaching: so what! We have seen this before. But rarely put numbers to it. $1,000 at 10.35% for 30 years give: $19,194. That's it!

You need to add zeros to the initial stake to make it interesting. Adding 2 zeros, making it $100,000, the expected value would grow to $1.9M, and still take 30 years to get there. But this is on the assumption that you did achieve the S&P 500 average.

Doing the calculations for the average U.S. investor gives: $1,000 at 3.66% for 30 years: $2,940. Again, that's it. And, again you had to wait 30 years to get there (10,957 days). Even adding two zeros projects an ending capital of: $293,992, of which you provided $100,000.

Now, if you are the average small trader, you should ask this fundamental question: is it really worth it? Because if you deduct inflation and taxes, you might find that you barely maintained the purchasing power of your initial capital over those 30 years. And those 30 years will be gone forever.

The conclusion is: you have to do more. But maybe first of all, you should give some thought to playing the game only if you have a sufficient stake to take a seat at the table and make it worthwhile.

#1   $1M  30 years
30 years

 (click to enlarge)

Consider 1M at a 20% CAGR over 30 years which gives: $237M. Now, that is more like it. For those wishing to do the calculation, the added capital during year 30 has an equivalent wage of: $19,781 per hour. That is better, and doable. Mr. Buffett has had a 20% CAGR over the last 50 years which is remarkable.

If you could add 10 more years at the same CAGR level, your initial $1M would have grown to: $1,469,771,568. And at year 40 would generate the equivalent wage of $122,480 an hour.

#2   $1M  40 years
40 years

 (click to enlarge) 

If you wanted to compare this to the average U.S. investor/trader, if he/she had a $1M stake, after 40 years, that stake would have grown to: $4,211,610 at a 3.66% CAGR. When it could have done much better. Even just reaching the S&P 500 average would have generated more than 10 times more, and this doing nothing but sitting on one's hands.

Do more: increase your initial stake and increase your CAGR to above average. That is your mission. That is your job. Find the tools to do it. And then make it happen. But mostly, give it time, it is required.


Created... July 23rd, 2016 © Guy R. Fleury. All rights reserved 

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