Investing

What is the average annual return for the S&P 500?

  • Last Updated:
  • Dec 1st, 2017 6:49 pm
[OP]
Jr. Member
Oct 29, 2017
115 posts
14 upvotes

What is the average annual return for the S&P 500?

From Investopedia - "Approximately 10% is the average return for the S&P 500 since its inception back in 1928. Adjusted for inflation the "real return" is more like 7%. Also worth noting that nearly half of the gains from the S&P 500 resulted from dividends. "

I'm just wondering why did the site make the point of saying it is worth nothing that half the gains are from dividends. What difference does it make if the gains are dividends or capital gains?
10 replies
Deal Fanatic
May 31, 2007
5018 posts
2172 upvotes
timc00k wrote: From Investopedia - "Approximately 10% is the average return for the S&P 500 since its inception back in 1928. Adjusted for inflation the "real return" is more like 7%. Also worth noting that nearly half of the gains from the S&P 500 resulted from dividends. "

I'm just wondering why did the site make the point of saying it is worth nothing that half the gains are from dividends. What difference does it make if the gains are dividends or capital gains?
No difference because total return is what matters. Just making a point that dividends add up and help boost compounding over long period of time.

Here is a calculator you can see what returns are for s&p 500 over any time period.

Long enough its about 11%, in USD.

http://www.moneychimp.com/features/market_cagr.htm
Deal Fanatic
Mar 24, 2008
6247 posts
2708 upvotes
Toronto
Is that good enough for most people or is it necessary to chase that next best performing stock with a massive risk attached to it? :rolleyes:
TFSA: XAW | RRSP: AOR | Non-reg: XUU + HXT
Deal Fanatic
User avatar
Dec 14, 2010
6755 posts
8657 upvotes
ksgill wrote: Is that good enough for most people or is it necessary to chase that next best performing stock with a massive risk attached to it? :rolleyes:

One can have a better performance than the market without chasing the next big stock. No need to be a good stock picker: We only need to be able to recognize quality companies, companies that are financially sound and buy them when they appear to be selling at a decent value, and then slowly add to them over time whenever those valuations reappear. The superior return from a good investment should come from buying good companies at a sound valuation. A diversified portfolio from stocks acquired with a decent margin of safety has less risks than an ETF, which you can't control the underlying, valuation and have to pay MER.

As I posted on another thread, one should not ignore the risks of a market cap ETF like SPY or equivalent:

- Not diversified as you think. A market-cap weighted strategy (which is SPY) does not offer the type of stock diversification that one would assume you would get with 500 stocks. You think you have invested in a fund with 500+ stocks because you don’t believe that fund managers are good at picking stocks, so you want to buy “the market”. But look at where your money is really going:

Roughly 50% of the fund is invested in the biggest 10% of the index
Roughly 1.3% of the fund is invested in the smallest 10% of the index
Call it what you will, but market-cap weighting is a low-cost method to pick stocks based on a single factor: size. The bottom 10% of this fund is almost irrelevant. Even if these small stocks double in price, this wouldn’t make much of a difference if the top 10% of the fund drops by 2-3%.

- Not invested in the biggest companies as you think. Market cap, which is the criteria that SPY is about, is simply price tag of outstanding shares times the share price. Therefore, stocks with a larger market capitalization have a larger weighting in the fund. A stock with a market cap of $50 billion would have ten times the weight in a fund than a stock with a market cap of $5 billion. But that not necessarily indicate the size of the company per se - just how the market is evaluating it. Therefore, many of the companies with most weight in SPY are overvalued, because fundamentals (that would dictate size of the business) are not taken into account. Just outstanding shares * share price. Fundamentals take into account Revenue or sales, cash flow, book value, dividends, and all that reflects the size of the business. Different than “size” in SPY or any market cap weight fund.

For example, consider this 2-stock portfolio: Facebook (FB) and Amazon (AMZN).
- Facebook has a market-cap of $512 billion and $33 billion in trailing 12-month revenue
- Amazon has a market-cap of $480 billion and $150 billion in trailing 12-month revenue

If we were to weight our positions according to current market value, we would hold very similar amounts of Facebook and Amazon.

If we were to weight our positions according to the economic footprint (in this instance I only consider total revenue for simplicity sake), our portfolio would be over 80% Amazon and less than 20% Facebook.

To that point, if you look at the Schwab Fundamental U.S. Large Company ETF (FNDX) you will see that Amazon gets a fundamental weighting of 0.18% in the portfolio vs. a market-cap weighting of 1.9% in the SPY. Facebook gets a fundamental weighting of 0.12% vs. a market-cap weighting of 1.8% in the SPY. Although the prices of Facebook and Amazon shares are sky-high and heavily weighted in the SPY, the economic footprints of these companies are much smaller than the market-cap suggests.

For these reasons, I think SPY carries more risk than a custom diversified portfolio based on real sector equal-weight, that were purchased with a decent margin of safety, and that not only has a tracking record of business quality but also is estimated to continue to grow.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:
Investing strategy based on dividend growth

Trading strategy based on Graham principles.
Deal Fanatic
Mar 24, 2008
6247 posts
2708 upvotes
Toronto
Jeez, not this wall of text again.
TFSA: XAW | RRSP: AOR | Non-reg: XUU + HXT
Deal Addict
User avatar
Feb 1, 2012
1943 posts
3241 upvotes
Thunder Bay, ON
freilona wrote: Lol
WALL not LOL! :)
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
Deal Addict
May 12, 2014
3291 posts
3278 upvotes
Montreal
timc00k wrote: I'm just wondering why did the site make the point of saying it is worth nothing that half the gains are from dividends.
Because you only get that return if you reinvest the dividends (ie: constantly buy and dollar cost average). If you consume (spend) the dividends, then you won't get that return.

Also, that "average" return is meaningless:

First, because your time horizon is unlikely to be 89 years.

Second, because the next 89 years (increased regulations, ageing populations, rise of China, etc), will look nothing like the previous 89 years (baby boom, rise of the USA, low regulations, etc.).
Deal Fanatic
Mar 24, 2008
6247 posts
2708 upvotes
Toronto
rodbarc wrote: "It's a beautiful wall" - Donald Trump.
Nice, you replied on the same level as me. Looks like I have finally broken through!
TFSA: XAW | RRSP: AOR | Non-reg: XUU + HXT
[OP]
Jr. Member
Oct 29, 2017
115 posts
14 upvotes
FrancisBacon wrote: Because you only get that return if you reinvest the dividends (ie: constantly buy and dollar cost average). If you consume (spend) the dividends, then you won't get that return.

Also, that "average" return is meaningless:

First, because your time horizon is unlikely to be 89 years.

Second, because the next 89 years (increased regulations, ageing populations, rise of China, etc), will look nothing like the previous 89 years (baby boom, rise of the USA, low regulations, etc.).
Thank you, this clears this up

Top