Those estimates are often wrong though, because the idea of annual 12% returns is complete fiction. In fact the idea of any particular percentage annually is fiction. For instance, I only recently started a pension, however if you look at the stock market history (for simplicity), had I started in 2000, the net gain I could have expected was almost precisely zero, if not negative. If I could have found something that paid 12% from 2000 to 2012, sure, I would have missed out on a lot, but there in fact not only was no such beast (in the broad sense), there was also a lot of ways to experience negative gain.
This is one of my favorite visualizations ever: http://www.nytimes.com/interactive/2011/01/02/business/20110... Be sure to carefully read what it is actually visualizing; I've posted this a couple times and people often knee-jerk a reaction to it based on a complete misreading of the chart.
In the context of this discussion (and indeed as reflects how most people invest), wouldn't it be more relevant to see the average rate of return assuming regular (inflation or income growth adjusted) annual investments?
Exactly. Depending on volatility you could get a positive return investing a set amount in a stock regularly, even if the stock started and finished at the exact same price.
In addition some stocks pay dividends; reinvesting these can also improve rate of return beyond what would be expected from just looking at the stock price.
Strange, at one point it says "High inlfation led to negative returns". When money is worth less, then you get more money when you sell something. In this case your share of a company. So why would the returns of investing in the S&P be affected by inflation?
Because the nature of inflation is to devalue money. For example, let's say you put $10k under your bed to buy a car for your kid when they turn 18, and let's say inflation was at 2% for those 18 years.
Now the 18 years have speed buy and you go grab your very old stack of $10k from under the bed frame to celebrate your kid leaving the house. When you get to the car dealership, you find the equivalent car you could have purchased now costs $14,282. Your money has lost almost a third of it's value just by inflation.
Inflation affects the number that you use to value the worth of a company.
Say you buy one share at $10 of a company with a billion outstanding shares. That company is worth, on the market, $10 billion.
Let's say that next year, the company's share price is still $10. Let's also say that inflation in that period was 4%. The company is still worth $10 billion, but each dollar is worth 4% less. The company's total value has dropped.
Inflation didn't cause the total value to drop. The company's value dropped for other reasons (bad sales, company president went crazy, market jitters, whatever causes these things) and inflation simply moved the numbers a bit in the opposite direction.
In short: inflation doesn't affect your returns, but it affects the numbers you use to measure them.
You say "In short: inflation doesn't affect your returns". And thats what I said. But the linked article says the opposite: "High inlfation led to negative returns".
This is one of my favorite visualizations ever: http://www.nytimes.com/interactive/2011/01/02/business/20110... Be sure to carefully read what it is actually visualizing; I've posted this a couple times and people often knee-jerk a reaction to it based on a complete misreading of the chart.