During the past few months I have been reading up on personal finance, including investing and investment strategies. While doing so it is pretty much impossible to miss out on Jack Bogle. Bogle is the founder of Vanguard, the creator of the first Exchange Traded Fund. There’s even the aptly named Bogleheads community.
Basically, their philosophy comes down to the following. No one can beat or time the market consistently, therefore it is best to buy low-cost diversified index funds, tracking markets as closely as possible. If you believe the market you’re investing in is efficient, that is.
Intrigued, I started digging into historical data for various stock market indices to see what my return on investment would have been if I entered the market at various points in time, for example just before a market crash or correction. By the way, meet Bob, world’s worst market timer.
There were various calculators available for the S&P 500 index already, but I could not really find one for major European market indices like the AEX, DAX or CAC40. Since Yahoo Finance has historical data for all of these indices freely available, I decided to hack together a calculator myself (see below).
After entering your start and end date, you can see how your annualized rate of return would have changed over the selected time period by doing nothing else than simply buying and holding on to your investment.
Takeways from the stock market ROI calculator
I think that the tool nicely shows that as your holding period increases:
- there is less volatility
- returns become more predictable
- for long enough time periods, negative returns are almost non-existing
Of course, past performance is no guarantee for future results.
That said, past performance can be used to see if your expectations are reasonable. If you expect an annualized 10% return over a 20 year investment in a fund tracking the AEX, it helps to know that that has never happened before.