Your question is essentially about what rate of return will index funds deliver in the future. This is because for any positive long-term rate, it’s not a matter of ‘how hard’ but rather of how many years, which in turn is determined by the rate of return.
I think the best way to think about what is the likely long-term rate of return from the stock market is as follows:
What is the historical context of long-term equity returns? Here is a chart of 10-year moving average returns for the S&P 500 based on the data from Robert Shiller of Yale. Notice how there are whole decades when returns are very low or negative. I am pointing this out not to scare you, but to make sure you have the right expectations going in.
Given current circumstances, what is the likely long-term (e.g. forward 10 year) rate of return currently being offered by the market at today’s valuations? It’s hard to be precise, but if we were to try to come up with a likely range of annual forward 10-year rates of U.S. equity returns, here is one way we could think about it:
- Inflation is currently at 1%-2%
- A reasonable estimate for long-term real GDP growth is 2%-3%
- Over the very long-term, corporate profits have tended to grow in-line with nominal GDP. You would have to adjust for the starting point (e.g. are we starting at a below-trend point like a recession or an above-trend point like a peak of the cycle). Given today’s environment it’s hard to argue that we are below trend, so let’s say we are somewhere between mid-cycle and peak, so we should adjust nominal GDP growth by 0% to some negative % to arrive at the likely 10-year corporate earnings growth rate.
- Change in valuation levels between now and 10 years from now. The biggest driver of valuations at the market level is interest rates. Current 10 and 30 year rates are well below long-term averages. So a reasonable range of outcomes might be no decrease in valuations to some decrease as interest rates revert to the mean. You can also look at measures like CAPE, which attempt to smooth out valuations and which are currently at above-average levels.
- To the annual price appreciation, we would then add the current dividend yield, which is below 2%.
- Summing it all up, I think that on a 10-year basis it wouldn’t be unreasonable to expect equities to produce returns in the 0%-7% per year from today.