It's widely believed that stock returns have been pitiful since the year 2000.
Our perception of history leads us to believe that stocks haven't returned much. After all, the period from 2000-2014 included the burst of the tech bubble, a short recession in the early 2000s, and a financial crisis to the tune we haven't seen since the Great Depression.
That's a fair assessment, but people who have saved and invested consistently over the 2000-2014 period have done quite well. Here's proof.
Looking at the model saver
We'll have to create a model to understand why stocks have performed better than most think. Let's call our model person Mark.
Mark graduated college in 1999 and landed a job that paid $35,000. On Jan. 1, 2000, he opened a brokerage account with just $1. At the end of every year starting in 2000, he invested 10% of his gross income. And despite being a stellar student and a hard worker, his salary grew at only the rate of inflation.
Mark isn't a stock picker. He knows nothing about finance. He just put 10% of his gross income in an S&P 500 index fund each year, and ignored it. On Dec. 31, 2014, he looked at his brokerage statements for the first time, and realized he was getting rich.
After making his final contribution in 2014, Mark's retirement account grew to $116,791. Each dollar he invested nearly doubled -- in fact, his balance is 1.88 times greater than what he contributed over the period. It's as if he had a magic money duplicator that could turn $5 into nearly $10.
The value of consistency
Mark bought stocks at high and low prices. In fact, his portfolio generated a negative return for the first three years he invested. And in his worst year, stocks dropped by nearly 37%.
But because Mark made a concentrated effort to save a consistent percentage of his income over time, Mark nearly doubled his money in a period that many describe as a "lost decade" -- a time when stocks are thought by many to have basically gone nowhere.
When you invest consistently, you invariably buy stocks at relative peaks and relative troughs. However, over time, the downturns that shake many people out of the market tend to be the source of the best overall returns. It may be hard to believe, but stocks bought during the financial crisis returned just as much as stocks purchased in the late 1990s.
Smart is getting the easy stuff right
No one can predict when stocks will take a dive, nor should anyone try. Likewise, it's impossible to predict exactly how much each dollar invested today will be worth 10, 20, or 30 years down the line.
But by buying consistently over long periods of time, and by paying your investments zero attention, you can achieve incredible long-run returns. Mark is now well ahead of his peers who didn't save, all because he spent just 10 minutes a year to contribute 10% of his gross income to investments.
The stock market doesn't make millionaires of people who try to answer the hard questions, or forecast the impossible. It makes millionaires of the consistent savers and investors: those who tune out pessimistic thoughts and make a concentrated effort to save and invest a fraction of their income over long periods of time.