14 Nov The Uncommon Average
The US stock market has delivered an average annual return of around 10% since 1926, as measured by the S&P 500 Index. However, as it went in the parable about the 6-foot tall person drowning in a river that was only 5-feet deep on average, the average can be—and often is—misleading. In the case of the stock market, experience and history has taught us that short-term results can, and do, vary significantly around the average. In any given period (e.g., a calendar year) stock returns can be significantly positive or significantly negative, or somewhere in between.
When setting expectations, we believe it’s helpful to recognize and acknowledge the range of outcomes experienced historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?
Exhibit 1 provides the answer.
The chart below shows calendar year returns for the S&P 500 Index since 1926. The two grey lines running horizontally across the chart marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 had a return within this range in only six of the past 91 calendar years (incidentally, 2016 was quite an “average” year by this standard). A casual glance at the chart reveals that in most years the index’s return was anything but average as most years’ return fell 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 average returns and being aware of the range of potential outcomes.
Tuning in to different frequencies
Despite the year-to-year uncertainty, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, 10, and 15 years in the US market. The data shows that, while positive performance is never assured, investors’ odds improve over longer time horizons.
While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets. We believe that armed with the knowledge and awareness of the range of potential outcomes investors stand a better chance of remaining disciplined through good times and bad, which in the long term can potentially increase the odds of achieving successful investment outcomes.
While there is certainly no silver bullet to helping investors to endure the unpredictable ups and downs of the markets, we believe that having a basic understanding of how markets work and an awareness of investment history are good starting points for any investor. In addition, maintaining an asset allocation that aligns with personal risk tolerances and investment goals is essential. We believe our role as wealth managers is to place a critical role in helping you, our clients, to sort thought these and other issues on your journey to realizing your goals.
Past performance is no 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.
All performance referenced is historical and is no guarantee of future results.
No strategy assures success or protects against loss.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
Stock investing involves risk including loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation do not protect against market risk.
S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a Registered Investment Advisor. Private Advisor Group and Kathmere Capital Management are separate entities from LPL Financial.