The Mystery of Annual Returns
Maybe it’s just me, but I love it when I see or hear something that can help you (the client/investor) to get a clearer perspective so that you can tune out the “noise” and worry less about money. For example, if there was something that you could know (maybe again?) that reminded you how irrelevant it is to dwell on short-term returns with investments, would you want to know more about it?
I recently came across an article written by Doug Buchan, from our advisor community (full article is here if you want to read it). He reviewed the last 92 years of market history and made an illuminating observation.
First, he points out (like we have many times before) that the “stock market” (S&P 500) has averaged 10%/year over the last 92 years. You’ve probably heard that before. It’s these next two questions, however, where it starts to get fun:
- Question #1: out of all those years, how many times did the S&P 500 end a year with an average return between 8 and 10%?
- Question #2: out of all those same years, how many times did the stock market have a return higher than 20%, or worse than negative 20%?
With the first question, you might be inclined to think that the market frequently has a year between 8-10%, right? After all, this is the range that many market forecasters seem to stay near with their annual predictions—the ‘safe guess’—as pointed out in the article. So what is the answer to number one? It’s zero. Not one of the last 92 years had a year where the market returned between 8-10%.
Okay, so how about that second question? It must be the rare occasion that the market has a year higher than 20%, or worse than negative 20%, right? Wrong; that answer is an astonishing 41%. 41% of the years were outside the range of +20% or -20%.
So when you think about the part of your portfolio that’s invested in companies (stocks), can you begin to see how the short-term movements are hard to predict? And if that’s the case, why would you give much attention to short-term market movements (especially when you know that over the long-term, returns are very sound)? To note: as your advisor, we can use these short-term movements to your advantage through rebalancing and any trading that would result in lowering your taxes. But outside of that the best thing to do to be a successful long-term investor remains the same: diversify, control for costs and taxes and let the power of the markets work for you.
And lastly, if these types of illustrations and conversations help you overcome the incessant wave of negative news related to the stock market please don’t hesitate to reach out to us.
Past performance is not a guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed.