Historical Returns and the Appropriate Time-Frame for Future Value Calculations: Implications for Risk Management and Personal Financial Planning

In future value calculations, investors often assume that the real return is constant over the planning horizon. We examine whether this assumption is appropriate. Our results suggest that investors can expect to earn the historical average real return provided their horizon is at least 15 years for stocks and at least 7 years for bonds, depending on the size of recent shocks. This “rule of thumb” assures reasonable insulation from the inevitable fluctuations of the market.