Anyone can retire as a millionaire! Consider this: If you invest $2,500 per year while earning 12 percent annual returns, then after 35 years you will have accumulated $1,079,159. But with annual returns of only 8 percent you will have just $430,792. Are these investment returns realistic over a long period of time? Based on the history of financial markets, the answer appears to be yes. For example, over the last 75 years the Standard and Poor’s index of large company common stocks has yielded almost a 13 percent average annual return. The study of investments could begin in many places | CHAPTER 1 A Brief History of Risk and Return Anyone can retire as a millionaire Consider this If you invest 2 500 per year while earning 12 percent annual returns then after 35 years you will have accumulated 1 079 159. But with annual returns of only 8 percent you will have just 430 792. Are these investment returns realistic over a long period of time Based on the history of financial markets the answer appears to be yes. For example over the last 75 years the Standard and Poor s index of large company common stocks has yielded almost a 13 percent average annual return. The study of investments could begin in many places. After thinking it over we decided that a brief history lesson is in order so we start our discussion of risk and return by looking back at what has happened to investors in . financial markets since 1925. In 1931 for example the stock market lost 43 percent of its value. Just two years later the market reversed itself and gained 54 percent. In more recent times the stock market lost about 25 percent of its value on October 19 1987 alone and it gained almost 40 percent in 1995. What lessons if any should investors learn from such shifts in the stock market We explore the last seven decades of market history to find out. The primary goal in this chapter is to see what financial market history can tell us about risk and return. One of the most important things to get out of this discussion is a perspective on the numbers. What is a high return What is a low return More generally what returns should we expect from financial assets such as stocks and bonds and what are the risks from such investments Beyond 2 Chapter 1 this we hope that by studying what did happen in the past we will at least gain some insight into what can happen in the future. The history of risk and return is made day by day in global financial markets. The internet is an excellent source of information on financial markets. Visit our website at finance cjlinks for
