These are my last words on this topic I promise. We have learnt that merely taking the average annualised return for an index and then back dating that figure to achieve a hypothetical magical figure is naive and reflects a tremendous lack of knowledge as to how markets work. Likewise suggesting that someone simply buy all the stocks in the index back in 1984 and hang onto them is also stupid.
However, I was wondering where this idea originally came from so I did some google fu last night and found that the funds management group Vanguard had released an article will an interestingly similar figure in it. You can find the original Vanguard piece here and I have snipped out the relevant chart below.
There is our magical start date of 1984 and our terminal figure of $278,615.
Dear Chris,
Are you saying that Vanguard’s chart data of the All Ords Accumulation is incorrect?
Yes – it contains the same basic errors that the article I referenced has.
Chris, your calculations are incorrect. Vanguard’s figures are correct.
30 June 1984, All Ords Acc = 1,615
30 June 2014, All Ords Acc = 45,021
If there was an All Ords index fund for the duration referenced in the article, the chart would closely resemble expected returns (not including tax along the way).
Also, what “basic errors” are you referring to? The “errors” you mentioned were not present in the original article, they were based on your incorrect calculation and assumptions.