Is it possible to earn 12% per year in the stock market?
If so, how?
If not, what is a more realistic return to expect to make in our investments?
That last question, in particular, is one that many people ask all the time and everyone
seems to have a different answer to it.
And the reason for that is because there are so many variables that go into answering the
question that it is incredibly unlikely that anybody is going to get the same exact answer
as somebody else because their situations are different, what they're investing in is
different, how much they're investing is different, and their time frames are also often times
different, and of course there is always the fact that we just can't predict the future
of the market.
Yet we still hear that you can expect maybe 6% or 7% per year on average in the market
over the long-term and sometimes we hear 8%, sometimes we here 10%, and of course sometimes
we even hear 12%.
Now that is an incredible claim!
12% a year... that means your money is doubling itself roughly every 6 years assuming you
follow the rule of 72's.
The man that makes that claim is Dave Ramsey someone who many on the internet are notoriously
against, at least when it comes to this particular claim.
Why is that?
Well, you might think yourself, that's because 12% is totally unrealistic, maybe even borderline
impossible for the average person.
So, of course, the internet would be mad at Dave for making that claim, he's misleading
people.
Why can't he just be honest?
But is he?
Is 12% actually that unrealistic?
Is this claim actually just a lie?
Those are some of the questions that I hope to find an answer to today.
Today we're going to find out if earning 12% on your investments is actually possible
for the average person.
Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about
Investing, debt, retirement, and many other general financial education videos because
the school's aren't going to do it for us.
So if any of those topics sound interesting to you or if you want to learn how to better
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this video with a friend, and leave a comment below letting me know what topics you'd
like me to cover in future videos.
So in order to find out whether 12% is actually possible for the average person we first need
to look at what the average person is capable of or desires to do when it comes to investing.
The average person probably doesn't want to spend a ton of hours looking at all these
different Investments and all these different sectors trying to find the absolute best possible
investment.
Investing just isn't a huge passion of theirs.
They realize how important investing is so they do invest, but they aren't necessarily
trying to find that diamond in the rough stock that nobody's heard of yet but eventually
is going to grow exponentially.
That doesn't mean that they can't chance upon said stock, they're just not spending a ton
of time researching and looking for that stock.
As a result, they're either more likely to put their investments into whatever their
financial advisor tells them is good or to invest in index funds like Warren Buffett
suggests.
Since I don't know what this hypothetical person's advisor would tell them is a good
mutual fund I'm going to just assume they follow Warren Buffett's advice and buy an
index fund.
In addition, I'm going to be using different dates than I usually do in these videos because
I have seen a couple of people complaining that I always use the same dates, namely the
dates of the last 40 years.
People have pointed out that the last 15 to 20 years have been some of the worst in the
history of the stock market and in terms of just pure stock value appreciation, they're
right.
Of course, that's not exactly the most important thing to look at which I've already covered
in a previous video link in the description, but that doesn't mean the idea isn't valid,
because it certainly is.
So in the interest of taking out two birds with one stone, I am going to only use dates
from 2000 onward in this video.
So let's get started in this video I'm going to be using three different index funds as
examples one of them is a small Cap Fund, one of them is a large-cap fund, and one of
them is a biotech fund that way we get a good mix of different sizes of companies and some
more focused investments so we see a little bit of everything.
The three funds I'm going to use are the IJR fund, the IBB fund, and the ONEQ fund.
Why only 3 funds you might ask?
Take a look at how long this video already is with just three funds.
That's why.
Lastly, before we get into the actual numbers as always I want to say that past performance
does not predict future results and I'm not saying that anyone should go out and buy any
of these three funds nor am I saying that they shouldn't buy any of these funds, I'm
just using them as examples.
As always be sure to speak with a professional that can look at your specific situation before
making any major financial decisions.
So let's talk about how this is going to work.
I'm going to start by taking a look at what the rate of returns would have been for each
of these funds had we put $10,000 into the market right at the start and then just let
it grow and then I'm going to look at how much of a difference we would see in the rate
of return if we were investing regularly instead of just putting in $10,000 and then letting
it sit.
So first I'm going to start with the ONEQ fund.
This is a fund that aims to track the NASDAQ composite index which I've covered in previous
videos and you guys are probably already fairly familiar with it since it along with the Dow
Jones Industrial Average and the S&P 500 is probably one of the more well-known indexes.
It is considered a large Cap Fund which basically means most of the companies within it are
fairly big companies and it was created on September 25th, 2003.
So I'm going to go back pretty much as far as I can with this index and say we started
investing in October of 2003 and let the investment grow until August of 2018 which is the latest
date I have as of the writing of this script.
Assuming you invested $10,000 into the fund in October of 2003 and didn't invest anything
more until today, except for the small amount of dividends that you got over those nearly
15 years, the fund would have grown from $10,000 to a little over $46,000 after all of the
expenses have been taken out.
That's an average annual rate of return of a little bit under 10.9%.
Not bad especially since we were investing during part of the DotCom bubble and had to
go through the housing crisis, but it isn't 12%.
Let's take a look at the IJR fund next.
The IJR fund is a small Cap Fund which basically means that most of the companies in it are
fairly small and it seeks to track the results of the S&P smallcap 600 index.
This one has been around a little bit longer than the ONEQ so it enables me to go back
before the dotCom bubble burst which is what I'm going to do.
We're going to start in June of 2000 which is right about when the dotCom bubble was
about to burst and then we're going to again go all the way to August of 2018.
Again let's assume that we put $10,000 into the market in June of 2000 which was not the
best time to invest a huge chunk of money and let's assume that with the exception
of dividends which we will reinvest, we don't put anything else in we just let the investment
grow.
After expenses, we would have an investment that is worth about $62,500 in August of 2018.
That's a rate of return of about 10.6%.
Again not bad especially considering we jumped in right before a crash and didn't continue
investing to help ourselves recover our net worths quicker because we were just letting
it ride but again it's still not 12%.
So let's take a look at the last one the IBB biotech fund.
The IBB fund seeks to track the investment results of an index composed of Biotech obviously
and also pharmaceutical equities listed on the NASDAQ.
Again unfortunately like many index funds, it hasn't been around for a really long time
the IBB was created on February 5th of 2001.
So that's as far back as I'm going to be able to go with this one.
For the record, this is why I usually use the actual indexes in my videos as opposed
to specific index funds because they've just been around longer so we have more data
on them.
But anyway say that we put $10,000 into the IBB fund in February of 2001 and just let
it grow just like the last two Investments all the way to August of 2018.
After expenses that investment would be worth about $37,500 today.
That's a return of 7.8% per year on average.
Not quite as good as the other two and certainly not 12%.
So looking at the numbers, it does seem that in terms of just pure growth on $10,000 or
$1,000 or whatever it happens to be...
12% at least 15 to 20 years does not seem to be a realistic expectation for the average
person.
However, the average person working and continually investing isn't just putting $10,000 in at
the beginning and letting it ride.
They may or may not even have $10,000 to be able to put in right at the beginning.
What they are doing is continually investing a certain amount every month until they decide
to retire.
And I would contend that the average person isn't quite as concerned about what their
rate of return on $10,000 would be as they are concerned with how much is their net worth
growing on average every year and how much can that net worth buy them today or a year
from now or 10 years from now?
So with that question in mind, I decided to go back to those same funds and see if there
would be any difference in the annual rate of return if we were investing every month
instead of just putting $10,000 in at the beginning and letting it ride.
I assumed with all three of these funds that we started with zero and invested $300 a month.
Under that scenario, if we invested $300 a month in the ONEQ fund over that same time
period after expenses we would have a net worth of about $164,000.
Which means that our actual effective annual rate of return is about 13.9% per year.
But wait a minute didn't the same stock over the same period of time only get us like 10.4%
just a couple of minutes ago what the heck happened?
Well a couple of things happened first we started looking at the growth of one's net
worth as opposed to just the growth of $10,000 invested as a lump sum and secondly, we started
taking advantage of compounding frequency.
Before we put in $10,000 right at the beginning and then just let it ride now we're adding
to our investments every single month, $300 at a time which means that we're actually
compounding the amount in our investments every single month.
So even though the stock prices are going up and down in the same exact way as before
we are recovering from the drops and taking advantage of the highs more effectively because
we're continually buying more shares which also means that when a dividend is given out
we're getting more and reinvesting it to continue building this snowball.
It's really a very powerful thing.
And if you want to check the numbers for yourself look up a compound interest calculator I recommend
the one on the calculator site.Com because it allows you to change from years to months
and it's just a bit more flexible overall than some of the other ones I found and it
is the one I used for this video.
But if you start with a base amount of $0 at an annual interest rate of 13.9% over the
course of 178 months which covers our time in this investment from October of 2003 to
August of 2018.
Put in a regular monthly deposit of $300 with a yearly compound interval and you'll see
that the net worth at the end is $163,900 which is right about what we ended up having
in our example.
Just for fun, I recommend you look at the bottom of those calculations and see that
it has numbers for the base amount, the interest rate, the effective annual rate (which is
the one that we as individuals would be most interested in), and the calculation period.
You'll notice that the interest rate and the effective annual rate are the same in this
example but if you go back to the top of the page and change the compound interval (which
is another way of saying compounding frequency) from yearly down to monthly and then have
it recalculate you'll notice that not only is your ending net worth different and higher
than before, but that effective annual rate shoots up to 14.82% simply because it was
compounding more frequently in this particular case.
That, in a nutshell, is why it is advantageous to continue investing on a consistent basis
because you're giving yourself a little bit of a boost in terms of rate of return just
by being consistent.
And if we take a look at the IJR fund and do the same thing that we did with the ONEQ
fund where we're investing $300 a month but this time it's over the course of 218 months,
we see that we have an ending net worth after expenses of about $223,900.
We put that into the compound interest calculator.
Again with zero for our base amount since we're starting with nothing, 218 months for
our calculation period, $300 being deposited every single month, compounded yearly since
we're trying to figure out what our annual rate of return is and you'll find that in
this example we achieved an effective annual rate of return of about 12.2%.
Looking at the IBB fund the numbers are fairly similar.
Again investing $300 a month for 210 months would have given us a net worth of about $238,500
and an effective annual rate of return of about 13.7% per year.
So is it realistic to expect a 12% rate of return in the market?
Well if we're going just purely on the growth of a lump sum amount probably not at least
not over these last 15-20 years for the average person.
However, if you take advantage of some quite simple investing hacks it is possible to have
your net worth increasing by an effective rate of return of 10%, 11%, or even nearly
12% even in these last 15 to 20 years.
So while I personally wouldn't want to expect 12% returns on my investments (I usually figure
something in the neighborhood of 7%-8% and anything above that is a bonus)… it is technically
possible.
The last thing that I want to point out is that if you account for inflation the numbers
would obviously be different.
And I would recommend keeping inflation in mind because the amount of money you have
isn't as important as what you can actually do with that money.
So if you account for inflation which has averaged between 2%-3% per year then you could
argue that it is difficult to increase your buying power by 12% per year through the stock
market alone, especially if you're retired and not increasing your income through raises
or a side hustle.
And that may well be true, even if you took 2%-3% off for inflation we're still looking
at average effective annualized returns of about 10%-11% per year depending on what you
are invested in even with the dot-com crash and the housing crisis factored in.
Which isn't half bad if you ask me.
Ultimately, the thing I want you to take away from this video is that in the end, the key
is to just keep investing.
Hey everyone, quick post-production note I recorded the audio for this video at the beginning
of September so I was using dates up to August of 2018 since that was the last full month
that I had access to at the time, but I wanted to give the updated figures through October
of 2018 since that's when this video is going to go up.
After the horrible month that October was for the market as a whole, the current return
figures for the IBB is about 11.8% per year after losing roughly 16% of its value in October.
For the IJR it's about 10.5% after losing about 15% of its value through October.
And for the ONEQ it's about 12% after losing over 13% of its value through October.
But that'll do it for me today once again if you enjoyed this video be sure to subscribe
and hit that Bell next to my name so that you'll be notified of all my future uploads.
I generally upload every single Friday, and if you have a friend that would be interested
in this kind of content be sure to share it with them and let's really get this information
out there and start our own Financial revolution.
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