A Key to Financial Success

Blog post #393

It can seem easy to remain invested in stocks when they are increasing.

You likely don’t feel worried or stressed when your assets are increasing, when you are making money. 

Your real test occurs when financial markets are down…when you are losing money. 

As your advisor, some key information can be helpful to your financial success. 

We want to help you to have reasonable expectations of the stock market. 

If you have reasonable expectations of the stock market, in advance, both positive and negative, this should help you to be a better long term investor. 

The US stock market, as defined by the S&P 500 Index**, has delivered an average annual return of around 10% since 1926. 

While we recommend investing in a globally diversified stock portfolio, using the S&P 500 Index as a base for discussing the stock market in general is appropriate for purposes of this post, even though the Index consists of only US based large companies. 

How often has the S&P 500 Index’s annual returns actually delivered returns near 10%? Actually, quite infrequently. 

The results are surprising! In Exhibit 1 below, there is a shaded band which represents the 10% historical average, plus or minus 2%. Thus, the band represents annual returns between 8-12%. As Exhibit 1 below shows, the S&P 500 Index has had returns of between 8-12% in only 6 of the past 93 calendar years, between 1926-2018. 

In most years, the Index’s return was outside of the 8-12% range, often above or below by a wide margin, with no clear pattern or predictability. 

The Index was down in 24 of the 93 years. That is 26% of the years. That means that 74% of the years, or almost 3 of every 4 years, the Index has been positive. That should help you to remain invested when the down years do occur. 

This emphasizes the point that while investing in stocks comes with significant volatility, the downward fluctuations are temporary. You need to have the emotional ability to stick with your asset allocation to stocks during the down years, to reap the long term positive rewards which stocks have provided in the past and are expected to in the future. 

You can potentially increase your chances of having a positive financial outcome by maintaining a long term focus. As Exhibit 2 documents, the longer you invest, your odds of success improve. While positive performance is not guaranteed, the past evidence is very strong. 



This data is for 12 month rolling time periods, not calendar years, between 1926-2018. For example, the first period starts in January, 1926. The second period starts in February, 1926. 

As the chart shows…
* 95% of the 10 year rolling periods were positive
* 88% of the 5 year rolling periods were positive and
* 75% of the one year rolling periods were positive. 

What can help you endure the ups and downs of the stock market?

There are no easy or simple answers. We feel that working with an advisor that provides you with this type of data, and explanations, can be a valuable starting point. 

If you are aware of the range of potential outcomes of the stock market, it should help you to remain disciplined. In the long term, this can increase your odds of a successful financial experience. 

We want to help you to be prepared for stock market volatility, as no one knows when that will occur. 

We want to help you to react rationally, and not emotionally, to the stock market, so that you can focus on the long term and strive to reach your long term financial goals. 

We strive to provide you with clarity and guidance, so you can have a greater sense of financial security, comfort and success

If you are not a client, we would be pleased to talk with you.  Call or email us.

If you are a client and have friends or relatives that could benefit from this type of guidance which you have received, please let them know about our firm.  We would be pleased to help them as well.  You can start the conversation.

For more reading on this topic, see our prior blog post, “When Average is Not Average.”

Source: The Uncommon Average, White Paper published by Dimensional Fund Advisors, May 2019 

**The Standard & Poor’s Composite 500 Index consists of 500 of the largest companies based in the U.S. The companies in the Index change over time. You should also realize that the companies within the S & P 500 have changed frequently over this period, as companies grow, fail, merge and get acquired.


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