Unexpectedly Intriguing!
25 October 2006

Craig Newmark cited our humble blog yesterday, remarking that:

One tool that I think I'll use the next time I preach to high schools about saving money is "Best and Worst Case Stock Market Investing".

Our tool for mapping the inflation-adjusted extremes of the performance of the total U.S. stock market is definitely one of our favorites, and our Lemony Snicket vs. King Midas tool is based upon it - but it does leave an open question that we often have to answer: How does the performance of the total stock market compare to the S&P 500?

We understand why. The S&P 500 is, after all, *the* benchmark against which all stock market investing performance is measured.

To date, we've only answered half the question in mapping the historical performance extremes of the S&P 500 index, and building a tool to estimate the best, worst and average performance of the S&P 500 for investments of any holding period.

Today, we'll answer the rest of the question by taking our mathematical model of the S&P 500's performance extremes and using it in the behind-the-scenes math of our Lemony Snicket tool! Now, you can find out what your actual returns would be if you make a fixed, once-a-year investment in the S&P 500 (like a lot of people do with their IRAs!), and you consistently get the best, average or worst case historical performance ever achieved by the index!

What's more, you can even play with the effects of inflation on your hypothetical absolute best, average and worst case performance! Our default value of 2.5% is the median average inflation rate (as measured by CPI-U) for all 30-year periods between 1871 and 2000, and we'll note for your reference that the worst 30-year period of inflation recorded in that period is 5.41%. You can see a small sample of this data in this Word document from Global Financial Data.

What value for inflation should you use for your investing horizon? The median average inflation rate will be the best representative of inflation for any holding period, but you should adjust this figure to consider a range of values above and below this quantity. As a general rule of thumb, the longer your investing horizon, the smaller the range around the 2.5% value you should consider.

Update (30 December 2006): Don't say we don't learn anything! We went and found the highest, lowest and average rates of inflation for the U.S. since 1913 and changed the default value in the tool below to match what we actually found. Plus, the tool we created in the link above will provide you with the range of historical values you need to consider!

As an added bonus, we've also expanded the range for the possible investing holding periods all the way out to 100 years! And why not? We've got the data to back it up....

Investment Data
Input Data Values
Annual Amount Invested ($USD)
Investing Period (years)
Average Rate of Inflation over Entire Holding Period (%)

Total Amounts Invested
Adjustments for Inflation Amounts ($USD)
Unadjusted for Inflation
Adjusted for Inflation
Investment Returns
Investing Scenario Returns ($USD)
Lemony Snicket (The Absolute Worst Case)
The Absolutely Average Case
King Midas (The Absolute Best Case)

The Total Amount Invested "Unadjusted for Inflation" is the amount that you actually contributed to your investment over the entire investing period. The "Adjusted for Inflation" amount shows how much this money would be worth at the end of the investing period if you used it to stuff your mattress instead (which we note for short periods of time can be a valid investment strategy....)

And to finally answer the question of how the performance of the total stock market compares to the S&P 500, well, all you need to do is to compare the results above with those in the original Lemony Snicket tool!

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About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations

Thanks in advance!

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