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Short Summary
Main recommendation: To base long-term projections on an 8% annual return, Graham Stephan says the historical average of four investments supports it: the S&P 500 index, individual stocks, real estate, and peer-to-peer lending. He stresses that an 8% return is a long-term historical average, not a guaranteed or consistent yearly figure.
Key Points
- The S&P 500 has historically averaged about 8% annually, adjusted for inflation with dividends reinvested, though 15-year periods vary widely (2000–2015 averaged about 2.5% annually).
- Individual stocks can return more than 8%, but they carry higher risk because fewer companies are held compared with the 500 in the index.
- Real estate can yield roughly 8–10% through cash-on-cash return, equity from loan paydown, and appreciation, but it requires more money down, good credit, income, and upfront work.
- Peer-to-peer lending platforms such as Lending Club and Prosper have reportedly returned about 7–10% by spreading small loans across many borrowers, though their performance during a recession is unproven.
Details Worth Noting
- Concrete instructions: For the S&P 500, Graham says he buys the Vanguard S&P 500 index fund (ticker VFIAX, which he pronounces "V Phi X") and automatically reinvests dividends, leaving it alone long term.
- Concrete instructions: For individual stocks, research companies, confirm they perform as expected, and adjust your portfolio if they don't; he says he personally avoids this approach.
- Concrete instructions: Graham walks through a hypothetical $100,000 home renting for $800/month with $20,000 down and an $80,000 30-year loan; with about $600/month in expenses, that yields roughly $200/month in cash flow, or about 12% cash-on-cash, as an illustration, not a guarantee.
- Concrete instructions: For peer-to-peer lending, spread money across many loans, for example $2,500 split into 100 loans of $25 each, so defaults are offset by the rest.
- In his hypothetical example, Graham adds up cash-on-cash (12%), loan paydown (7%), and appreciation (10%) to reach about 29% in the first year, stressing this is just an illustrative scenario, not a typical or guaranteed outcome.
- Graham mentions other options such as public storage centers, mobile home parks, and franchises, and says he views cryptocurrency as too risky to model long term.
Bottom Line
Graham treats 8% as a reasonable long-term planning assumption drawn from historical averages across several asset classes, not a guaranteed return, and he emphasizes that actual results will vary year to year.
