Why Invest? US Stock Market Returns
Much can be learned from 200 years of stock market history. The data above was compiled by researchers at Pennsylvania State and Yale University. From 1826- 1956 the data compiled came from the S&P 90 the predecessor of the S&P 500. The S&P 500 was created in 1957 and the data for total returns from it has been used from then until now. Remember that total return includes capital appreciation in the stock and dividends paid and re-invested. These returns are annual returns that are then compounded annually over time. The above chart includes 1825-2019. In 2020, the total return was up 18.40% and in 2021 the S&P was up 28.71%. The average return for 200 years through 2019 was 9.56%. The geometric average return for the S&P 500 from 1957- 2021 was 10.6%. From 1926-2021 the return was 10.49%. At an annual compounded rate of 10.49% your money will double every 7 years. Where else can you get a return on your money like that?
Stock Returns are Volatile but Predictable Over Time
Stock returns are not predictable or linear. While 70% of the time returns in the stock market are positive, 30% of the years the return is a decrease. Because of this volatility, stocks have a longer investment time horizon so that they have time to recover from a downturn. Since 1926 there has never been a rolling 15-year period where the US stock market did not have a positive return, net of inflation. The timeframe for stock fund investments is 8 years and longer otherwise you are speculating that the market will not pullback. The largest mistake individuals who manage their own stock portfolios make is to try to time the market. Timing the market means that they try to avoid the loss years by selling stock positions and then try to predict when to get back in, to enjoy only positive returns. This is an impossible task that even the best stock market professionals cannot accomplish. Selling in a down market flies in the face of the axiom “buy low and sell high.” History tells us that in a stock market downturn, the best strategy is to hold and buy stock funds to rebalance the portfolio back to your target stock/bond ratio. Most of my clients are 50%-60% stock funds and 40%-50% bond funds. The downturn should be seen as an opportunity for the long-term investor.
Below are the annual total returns for the US stock market. The last three years has returned 2019-31.49%; 2020 -18.40%; and 2021- 28.71%. In 2022 the market is down 14% for the year. This represents about half of the gains from 2021 alone. Since 2008 the annual return for the 13 years up until 2022 is 15.98%. At this rate an investors money invested in the S&P500 doubles every 5 years. Looking at the below table of returns since 1926, it is apparent that after a market downturn there is typically a large positive gain in the year after the downturn. After huge losses from 1929- 1932, the market bounced 54% in 1933 then another 47% in 1935. The same dynamic occurred in 1973-1974 with huge losses followed the next year with a 37% increase in 1975. Again in 2000-2002 with a 29% increase in 2003. The 37% decrease in 2008 was followed by the longest bull market in stock market history lasting until 2022. Trying to time these decreases and increases is impossible but don’t despair as the history of the stock market shows that the downturns, while sometimes intense, don’t last long and the market has always recovered within a reasonable amount of time.
Let’s plug the returns from 2008- 2022 into the formula for the geometric return to determine how an investment would have fared over the last 14 years, when the first year was a 37% loss. The formula for the geometric return is below:
√(# of years&(1+YR 1 return),x (1+YR 2 return)…….x (1+YR 5 return)) -1
The geometric return must be used when dealing with numbers that have annual growth and decay. Let’s now plug in the 14 years of returns, from 2008-2021, to determine the geometric return which will model what would have occurred in the real-world for the last 14 years.
-1= 9.09% annual return over 14 years with the first year having a 37% decline.
Now let’s plug our 14-year geometric average return of 9.09% using a $1 million-dollar initial investment compounded annually for 14 years.
Even with the 37% decline in year one, the investment has tripled over the last 14 years. Call a Certified Financial Planner to help you formulate a strategy for your money during this downturn.