Mar 24, 2016
There is a never ending discussion over which is better, owning growth stocks or value stocks. Depending on your timeframe the returns are the same for both. The two styles vary their performance returns, one coming into fashion and then a couple of years later the other style will outperform. Vanguard funds did a study some years ago that was most surprising. Over a 60 year period from 1937 to 1997 the returns were almost identical. Growth stocks returned an average of 11.7%, while value stocks returned an average of 11.5% over the same time period. What is important to take away from this study are two points; both growth and value perform the same and over 60 years the companies returned 11.5% compounded.
If you had invested $100,000 in 1937 through 1997 and reinvested your dividends, the annual compounded return was 11.5%. Your $100,000 investment turned into $76,393,000! No that is not a typo, $76 million. So if the question is which is better, growth or value, the answer is yes! That is the power of compounding over 60 years.
Let’s take a more recent shorter period of 20 years, from 1995 through 2015. We are all more familiar with this timeframe. The dot.com bust, 9/11 and the resulting war in the Middle East, two recessions and two huge stock market selloffs. Your $100,000 during that time period, invested in the market with dividends reinvested returned an annual return of 9.44% compounded. Your $100,000 would be worth $665,000. If we used a 10 year period from 2005 through 2015 the same $100,000 turned into $212,000.
These calculations are based on the actual yearly returns and dividends for the time periods indicated.
The point of my illustration is to ask you not to be alarmed when there is another selloff in stock prices. There will be another selloff as there always has been since there have been markets. Rather than succumb to all the hype and hysteria by the press during declining markets, think of it as an opportunity to add to positions in great companies at lower prices. Declining markets feed on fear and selloffs occur much faster than markets rise. The declining prices usually only last months, where gains go on for years. The stock market is the only place customers run for the exits when prices are marked down.
Average returns are a smoothed out single number, such as 11.5%, the average return from 1937 to 1997. Rarely will any one year return be 11.5%, instead one year returns may be +17% and the next year return may be down -5.5%. Do not expect for markets to only go up, they do not. Just know the average over a long period of time, coupled with the miracle of compounding has been very rewarding. Even with all the ups and down, the long term investor that invested in stocks has done very well, better than anywhere else.