How much would an investment in the S&P 500 be worth today, with dividends reinvested but adjusted for inflation, had you invested that money 5, 10, 15, 20 and 30 years ago? The following charts illustrate the annualized real rates of return over those periods of time.
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5 years: 10.99%
10 years: 7.42%
15 years: 7.20%
20 years: 4.20%
30 years: 7.74%
As these charts illustrate, and as many households have discovered during the 21st century so far, investing in equities carries substantial risk. Households approaching retirement should understand this risk and make rational decisions about diversification.
In the past, we’ve suggested that they should also consider fixed income alternatives for that part of the nest egg that will pay non-discretionary expenses not covered by Social Security and pensions. Unfortunately, this traditional wisdom has been less helpful in recent years owing to the Fed Zero Interest Rate Policy (ZIRP) and various stimulus strategies, which have collectively shrunk interest rates.
With the end of ZIRP in December 2015 and several rounds of Fed rate hikes, it will be particularly interesting to see how this slow-motion roller coaster plays out in the years ahead.
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