When it comes to investing, are you more prone to suffer Lemony Snicket's Series of Unfortunate Events
Today, in honor of the DVD release
The calculator below allows you to enter a fixed amount that you would invest each year for the number of years you specify. You will be invested in the entire U.S. stock market, which may be fairly represented by today's Wilshire 5000 index. For each year a deposit is made in your investment account, the amount of money you place in the hands of either King Midas or Count Olaf will, for the length of time that the money is invested, have either the corresponding best or worst case inflation-adjusted rate of return as outlined by Political Calculations' post Best and Worst Case Stock Market Investing.
For example, the money that would be deposited for a period of one year will have two future values calculated, one based upon the best historical rate of return for a one year period and the other based upon the worst historical rate of return for a one year period. This process would be repeated for the money placed with these "advisors" for two years, five years, twenty years and so on, until the entire term of your investment period is covered (up to fifty years.) The respective future values for each investment term are added together and provided in the calculator's results below:
Using the calculator, we can find some surprising results, particularly in the Lemony Snicket scenario (of course, we expected good results from King Midas!)
Even with the worst historical inflation-adjusted rates of return, after 29 years of investing, an investor will at least break even (an effective rate of return of 0.0% for that investing period.) In 38 years, the investor would have an effective rate of return of at least 2.0% for their investment, outperforming such "safe" investments as government bonds. After 46 years, the investment account would be worth more than twice what had initially been invested, with an effective rate of return over the entire period of roughly 2.9%. In fifty years, the maximum for the calculator, your effective rate of return on your entire investment in the Lemony Snicket scenario would be slightly over 3.4%. And also notice that at no point in this exercise did the investment lose its entire value.
More than anything else, the Lemony Snicket scenario shows the power of investment diversification and compounding interest over time when it comes to investing. Even with Count Olaf's horrible timing encompassing the worst stock market performances in history, provided the investment is suitably diversified and combined with the compound nature of long term investment growth, even Count Olaf could come out ahead!
Update 26 September 2005: Want to see the best and worst case rates of return over the past 105 years for various investment periods for the S&P 500 index? A graph and calculator for determining those rates of return is available here!
Labels: best case, investing, tool, worst case
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Closing values for previous trading day.
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