In this post, we will try to verify the myth that says that indices yield a return of 8% per annum. Warren Buffett recommended that we all wait for the indices.
Take, for example, the 500P&S index. It is an index made up of the 500 largest companies traded on US stock exchanges. If we look at it, we see that it has been on the rise over the years. And yet, within this upward trend, there are sometimes downward and upward dips depending on what is happening in the economic world and what is due to investor behavior.
For example, the indices rose excessively in the dot-com bubble because investors ran after many dream stocks. In contrast, in 2008 came a real economic crisis that brought down all the markets and economies in the world and put them into recession. After the steep decline in the crisis in 2008, we are in a powerful and long 14-year rally.
During this time, there have been several falls in the markets, mainly in the past three years; at the end of 2018, when the trade war between the US and China heated up, the markets fell 20%, and in March 2020, the markets fell 40% due to the coronavirus.
In this regard, Warren Buffett was right; buying a certificate/ETF that imitates this index and holds it will always yield a passive and safe return.
We will try to analyze passive and long-term investment in the P&S 500 index.
In the chart below, you can see the average annual return that we would have achieved at any point over the past 70 years if we had bought the index and held it for 20 years.
For example, those who bought the index in the 1960s and sold after 20 years achieved an annual return of between 4-6%, and those who bought the index in the 1980s and sold after 20 years achieved an annual return of about 14%.
If you look at the average of this graph, we get a little more than 8% across all points in time, and from here comes the myth of 8% per year.