AS SEEN IN THE AUGUST ISSUE OF THE CURRENT HUB
How good is it to be average? Well, it depends. A batting average of .300 in the major leagues is good, but saving the employee average percentage into your employer’s 401k plan? Not so much. What about in the world of investing? Is earning the average investment return a good thing? As it turns out, it is!
But how often does the average return occur? The US stock market has delivered an average annual return of around 10% since 1926 (source: S&P Dow Jones Indices). But short-term results may vary, and in any given period stock returns can be positive, negative, or flat.
This is an important aspect to investing as it drives our expectations for future results. To broaden your understanding look at Exhibit 1 below. Do you see the range of historical outcomes experienced by investors? How often have the stock market’s annual returns actually aligned with its long-term average of about 10%?
As it turns out, not very often. Exhibit 1 shows calendar-year returns for the S&P 500 Index since 1926. 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, the data highlights the importance of looking beyond average returns and being aware of the range of potential outcomes. This will help to properly manage your own expectations of future results. But remember – to earn the average return of about 10% you must remain invested throughout the whole time period.
It is important to have an investment philosophy. One that is disciplined and consistent so that you can stick with it through good and bad market results – this is paramount. Life is a journey. Navigate it wisely.
Reviewed & Approved: VN 7/22/19