How to look at annual returns from index

Investing
#1

We will take annual performance of index and their returns, not in all years they give a positive returns so considering I put 1000 usd in SPY500 this year and it gave -6 percentage returns now in next year the SPY gives me +7 percentage so basically i made only 1 percentage profit over two years ? , Can you please explain how to calculate the returns and how to invest in what index specifically it would be very helpful

Thanks :blush:

#2

Hi ajayaj,

That is a common misconception. It depends where you are counting from. Say you put in money on January 1, 2020 and saw a 6% drop by December 31,2020. So in our example we will say your initial investment was a $100. That would reduce to $94.

Now say during the second year. The market gained 7% from January 1st, 2021 to December 31st, 2021. Your starting capital was $94, not $100. So you would gain 7% of $94. A good rule of thumb is to multiply the starting capital times 1.XX, where XX is the decimal format of the percentage. So, in our example it would be 1.07. So 94 * 1.07 would equal 100.58.

So your overall gain from the 2 years would not be 1%. It would be 0.58%. Let me know if that makes sense.

Summary:
1st year: 100->94
Gain -6%

2nd year: 94->100.58
Gain +7%

Overall: 100->100.58
Gain +0.58%

#3

Hey @ajayaj!

I would add a reminder to “think long term”. In your very short scenario, sure you’re not up much. But over the course of every 40 year period in the market, the market has been up about 10% per year on average. The actual number you care about is the “Cumulative Annual Growth Rate” or CAGR. That gives you your annual growth rate after all those ups and downs are accounted for.

Regarding which index fund, I love target date index funds! Check this article for why that has ticker symbols on the bottoms:

#4

Thanks for the calculation Nirav now i get it :blush:

1 Like
#5

Yes Jeremy I am kinda stuck now , there is fixed deposit system in a bank which gives me around 6.0 percentage annually with no risk of capital meaning no negative returns at all so I am kinda confused to put money in a deposit account or a targeted index

#6

Hm… that doesn’t something a bank would offer. Are you sure you’re not talking to an insurance salesman? Did the term “annuity” or “whole life insurance” come up?

Either way, no, I wouldn’t go for 6%. I’d go for a target date index fund.

#7

Yeah it’s not in the US so i guess you will not know ,banks in India give 6 percentage interest annually for fixed deposit

#8

Ah, yeah in India you probably have higher inflation which is why you have higher bank rates. I would still do most of your investing by buying and holding globally diverse index funds!