May 13, 2012

S&P 500 Return Calculator

This is a post about another post.    DQYDJ created a S&P 500 Return Calculator 
Their calculator is neat for a few reasons.  It lets you pick any start date and end dates by month and year.  You can see the total growth and the annualized returns.   They also figure the returns if dividends are reinvested and without dividends.  Finally the calculator  also has a feature to adjust the figures for inflation so you can see how the return performed in real dollar terms. 

One good use of the calculator is to compare your own investment returns to the S&P 500 index.   I've done this kind of thing in the past with my own returns on my Roth IRA investments.   Comparing your return rates to an index is an important step to make sure you're performing well versus a simple benchmark. 

Lets walk through an example of benchmarking your investment returns to the S&P 500 using the calculator:   Lets say you put $5000 into your Roth IRA back in April 2009 and its grown by 45% over the past 3 years.   If we figure the compound annual growth rate on that it comes out to about 13%.   Thats pretty good right?   Who would complain about 13% annual growth?    But... how does it compare to the S&P 500?  If you use the S&P 500 Return Calculator  then you can see how the S&P 500 index compares as a benchmark.   Using the calculator I plug in April 2009 for the start date and April 2012 for the end date.  I'll leave the 'adjust for inflation' box unchecked since we're not accounting for inflation now.  I hit calculate and it informs me that in the same period the S&P 500 was up a total 66.2% with dividends reinvested for annual compound growth of 18.4%.   Now that 13% annual return doesn't seem so hot does it?   The index beat my returns by 5% annually.  

You probably have multiple investment purchases spread over time.  So rather than having a single IRA contribution in 4/09 you more likely added money in April of 2008, April 2009, March 2010, April 2011, and finally in April 2012.   In that kind of case you can use the  
S&P 500 Return Calculator multiple times to figure the growth of the S&P 500 for each time frame.  So if you put $5000 in each year then use the calculator on each date period to see how each  $5000  contribution would have grown.  From April 08 to '12 the S&P is up 3%.  So that $5000 is now worth about $5150 (103% x $5000).   From April 09 to '12 the S&P is up a nice 66% so that contribution would have grown to $8300.  If you do this for each contribution and add them up you'll get the total growth of similar investments in the S&P over time.  You can then compare that to what your own account balance has grown to.

Someone could argue that the S&P 500 isn't a great benchmark.   That may be true in general but its a basic starting place.   For example if your investments are all in safe bond funds then comparing to the S&P 500 is a bit of an apples to oranges comparison.   I really wouldn't expect bonds to out perform the S&P500 long term.   But its still good to know where your investments fall in comparison to a basic stock index like the S&P.


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