Monday, March 16, 2009

S&P 500 Index...a 580 % rate of return

During a good year in a strong bull market one might see a 20 percent net gain. As one lengthens the period of time, the percentage gain per year drops. For a good 5 year period the average year may be closer to 15 percent per year, compounded annually.

Taking an even longer historic view, if one goes back to the 1930s time period for the Dow Jones Industrial Average, the annual equivalent rate of return over about 80 years is in-the-order-of 3 percent to 6 percent per year. The 3-6 % spread comes from using peaks or lows at both ends. These numbers suggest that the longer one is invested, the more likely they are to see lower returns of rate.

At the other end of the rate spectrum, consider the market rally over the last 10 calendar days. The media has been focusing on how the markets have risen for the last 5 trading days. This rally has produced a very impressive short-term rate of return.

The SP500 Index rose from a low of 667 on March 6 to a high today of 774. This was a point gain of 107 points over the starting level of 667. A total gain of 16 percent over 10 calendar days. This is equivalent to an annual gain of 584 percent per day. The two ends of this spectrum are 3 percent and 580 percent. Interesting numbers here.

Based on nothing more than the 500 % + unsustainable rate of return recently we should not be surprised to see the markets drop significantly over the next few days.

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