During the past few months I have been reading up on investing and investment strategies. While doing so, it is pretty much impossible to miss out on Jack Bogle, founder of Vanguard and the first Exchange Traded Fund, and 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 IBEX. Since Yahoo Finance has historical data for these indices freely available, I built a calculator myself: Stock Market ROI calculator.
After entering your start and end date, you can see how your investments would have performed over time.
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.