Q: How many percent of the average investor can achieve, say, 5-15% (average 10%) compound return every year over 20Y, like a snowball?
A: I would say one in 1000. Risk-free compound return rate is assumed to be 2%, so 10% is not easy and not common. More realistic is 4% compound return. Looking at the 4% CPF calc, I think the noticeable effect of compounding requires consistent high return and a holding window of 20+ years. Most people don’t have a lot of money to put aside for so long. Therefore, I think compound return is overrated.
From now on, my focus will be mostly equities.
Most textbooks say that it’s a standard and useful (but few say “safe”) assumption to assume an investment has an average annual
return of x% (say 5% per year) and therefore we can expect to get exponential compound return if we hold it a few decades. http://www.forbes.com/sites/greggfisher/2013/03/11/savings-start-early/ and many articles quote famous people saying compound return is such a great, under-appreciated secret.
In recent years I have looked at hundreds of equity (or balanced) portfolio performance charts. Most of them are “with dividend reinvested“. All of them are supposed to exhibit ECR [exp compound return]. Now I can safely say that with equity mutual funds (perhaps due to annual fee), the Compound Return is a joke, a lie, a misleading math model and unrealistic theory.
Mathematically, if you write down the annual returns of any security, you get a series of numbers you can average. Ok 2%. So on average $1 becomes 1.02, and then becomes 1.02*1.02…. yes compounded, but that’s a mathematical procedure on paper. ECR would show an exponential growth, (slightly) curving up. In reality, I see very few such curves. For most equity funds, most often i see a flat trend i.e. up and down but no up-trend. Yes some funds show an up-trend, but nothing exponential.
I think the problem with the mathematical procedure is, taking the average return and using it to plot an exponential growth path is completely off the actual path. The 2 paths don’t match at all. The exponential path is, in my opinion, unrelated to the real path and doesn’t represent anything meaningful about the investment.
(I should include a graphical example.)
The conventional wisdom says “start investing in your 20’s to capture compounded returns“. Some investors are able to stick to a fund with $20k and see the NAV growing long term, despite short term fluctuations. Consider my GS 401k. I don’t notice any compound return.
The equity funds I have stuck to for 1 to 3 years appear directionless. Never seen anything doubling. (The bond funds slowly grow, but not showing compound return.) Therefore my real experience seems to indicate rather few sectors can give compounded growth.
DJIA (and SP500) is a poster child example. Does it show compound return in the last 20 years after the last regime change (the tech boom)? I don’t see any.
Fundamentally, listed equity prices are driven largely by herd sentiment etc, rather than corporate profit (or potential thereof). Therefore a price can surge too fast then crash. Such a path will never be exponential and therefore always surprise those who expect to see ECR.
In conclusion, if we hope to buy and hold and get Compound return of, say 5% per year, we are likely disappointed when we want to cash out. Our total return seems to depend on timing and not on the exponential formula.
— a young company’s stock price can show exponential growth, maybe for the first 5-10 years(?)
In fact, many young stocks endure a bump rise or long troughs, but over-compensated by a subsequent shoot-up phase. Therefore, the curve still looks exponential. This is explained in fake exponential due to end-stage shoot-up.
When market cap grows to 10b, it can’t grow exponentially. I think it has to do with the nature of market growth for a given product. I think few new products have its market growing exponentially more than 10Y
— Regime change in stock markets — As to the S&P growth curve in the Forbes article, exponential growth is visible in the first 20 years. After that, i don’t see any. Similarly, in most stock index charts, you could see some exponential growth in early history, but nothing exponential in the last 20 years (2000-2020).
Except young stocks, I feel ECR is now dead at a global level, including the U.S.
However, in 2050 when we look back, we may still see a fake exponential growth in 2000-2021 , iFF there is a shoot-up observation towards the end. This is explained in fake exponential due to end-stage shoot-up.