I am currently reading Dave Ramsey's "Total Money Makeover" and he claims the S&P 500 has had an average 12% rate of return in the last 80+ years. I'm going to call funny or lucky math on that one.
I assume he must have taken the current S&P value the day he wrote (copyright 2003) and used that number to back out the % return vs. the value 80 years ago. I used trend lines instead.
If you use Excel to graph the S&P 500 values from the beginning (1871) till now and make a exponential trend line, the % return is 4.45%. I figured that was a little harsh though since it started out much more stagnant than today. I tried again, from 1922 till 2002 (80 years like he claimed), it was only 6.19%. Using this method, if you use any year earlier than 1964, the return is less than the 8% most people assume they get.
If you use today's data, as opposed to 2002, it is worse. You get 8% return if you are looking back to any of the 1970's, but everything else before the 2008 crash is 7% or less.
Bottom line, you can't use historical data to justify a 12% return and maybe not even an 8% without carefully chosen numbers. Ramsey's book was just written after a few decades of great numbers.
Note: this doesn't mean his principles are bad, just inflated. I am loving the book!
Submitted June 13, 2017 at 05:29AM by rexmorrow http://ift.tt/2swy2Cd
