This tool shows annual returns from several major market indexes. It will also calculate average and effective rates of return over a selected time period. Additionally, one can impose optional constraints on the market history to simulate calculated returns on index-based investment vehicles. How to use the tool: First, select a market index from the top-left index group. Second, select the time frame start and end year. These year selections are "inclusive" meaning that we're going from the beginning of the start year to the end of the end year. Because of this, if you select 1950 for both the start and end year, you will see the results for one full year (1950). Another point of note is that the available data for each market index is different. For instance, the Dow Jones Industrials index contains historic data back to 1929, whereas the Russell 2000 only goes back as far as 1994. You'll want to keep this in mind as you switch between indexes because the start year may change based on the earliest available data year for the index. (Optionally) third, to illustrate constrained market returns, you may activate one or more constraints by checking the box next to the constraint type and setting the desired constraint. A constraint is only active (and configurable) if the checkbox has been checked. •Floor: The minimum return allowed for a single year. (Can be negative if desired.) •Cap: The maximum return allowed in a single year. •Spread: The return percentage to forgo in positive years. •Fee: The return percentage to forgo in all years •Participation: Modifies the return to reflect a percentage of the actual. For example, if the actual return was 10%, but participation was set for 70%, the displayed return would be 7% (10% * .7). •Multi-Yr: Returns are calculated point-to-point over a set number of years. When activated, this value is calculated first, then any additional limits are applied to the result. The Market Returns chart displays the real-time results of your index, time frame and constraint selections. The chart displays both the actual annual values and the limited values side-by-side for comparison. The Market Statistics result area displays summary data for the active market selection and optional constraints (limited). The difference between Average and Actual Rate of Return is worth explaining. Average is the mathematical average of the annual returns (just like grade school math class... add all the numbers up and divide by the number of years.) This average is the most commonly quoted "average market return" - possibly because it looks best. However, the true financial impact of the varying returns is not accurately reflected with this method. Instead, one must consider the effect that loss of principal from negative years has on long-term growth. We achieve this by assuming a single dollar is invested at the beginning of the first year. At the end of each year, the annual return is applied to generate an end-of-year "balance" on the $1 initial investment. This process is repeated through the selected time frame. Finally, a TVM (Time Value of Money) calculation is made to determine what rate of return is required for a predetermined (initially $1) initial investment to reach the final balance over the specified time frame. This is the actual return on the investment. |
No example script available for this screen. |
The historic data is acquired by the individual market index providers and updated on an annual basis. (Sources are available by clicking the [Source] button on the calculator.) Calculations for Market Statistics: Number of Years Selected - The number of calendar years between the start and end years inclusive. I.e. 2000 - 2010 = 11 years because it starts at the beginning of 2000 and goes through the end of 2010. Average ROR over Period - The mathematical average over the time period. Sum of all returns in period / number of periods. $1 Invested would equal - This is calculated by assuming a single dollar (or alternately entered predetermined amount) is invested at the beginning of the first year. At the end of each year, the annual return is applied to generate an end-of-year "balance" on the initial investment. This process is repeated through the entire time frame with the final result being displayed in the Market Statistics area. Actual ROR over Period - This is calculated using the RATE function of a time value of money calculator. The following inputs would be used: PV = -$1, Number of Periods = time frame in years, PMT = 0, FV = final result of $1 invested. (TVM Hint: The PV is negative to indicate it's a cash outflow. The FV will be positive indicating it's a cash inflow.) |