“I have found that the importance of having an investment philosophy — one that is robust and that you can stick with — cannot be overstated.” –David Booth, former CEO and Founder, Dimensional Fund Advisors
The US stock market has delivered an average annual return of around 10% since 1926. But short-term results vary widely, and in any given period stock returns can be positive, negative, or flat. When thinking about what to expect, it’s helpful to see the historical range of outcomes experienced by investors. How often have the stock market’s annual returns actually aligned with its long-term average? Rarely.
Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926.1 The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 Index had a return within this range in only six of the past 93 calendar years. In most years, the index’s return was outside of the range — often above or below by a wide margin — with no obvious pattern. For investors, this data highlights the importance of looking beyond the “average” and being aware of a huge range of possible outcomes.
Exhibit 1. S&P 500 Index Annual Returns 1926–2018
In US dollars. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.
TUNING IN TO DIFFERENT FREQUENCIES
Despite the year-to-year volatility, investors may increase their chances of positive outcomes if they maintain a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, and 10 years in the US market. The data show that, while positive performance is never assured, investors’ odds improve dramatically over longer time horizons.
Exhibit 2. Frequency of Positive Returns in the S&P 500 Index Overlapping Periods: 1926–2018
In US dollars. From January 1926–December 2018, there are 997 overlapping 10-year periods, 1,057 overlapping 5-year periods, and 1,105 overlapping 1-year periods. The first period starts in January 1926, the second period starts in February 1926, the third in March 1926, and so on. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.
CONCLUSION
Most investors might find it easy to stay the course in years with above average returns. Disappointing periods will test your philosophy or approach for equity investing. Being aware of the normal range of possible outcomes can help investors remain disciplined. Being disciplined increases the odds of having a successful investment experience.
What helps investors better endure inevitable market ups and downs? First, understanding how markets work and having a belief that market prices are fair are a good start. Next, having a scientific investing strategy using sensible global asset classes and not being concentrated only in U.S. large stocks. Then having an investment policy that aligns risk with your true personal preferences and wealth planning goals.
By understanding what matters and working with an experienced CFP® wealth management professional, you will be better positioned for a more reliable retirement outcome with more confidence during whatever troubled markets and times are yet to come.
1As measured by the S&P 500 Index from 1926–2018.