When Average is Not Average

When we discuss future expected investment returns from US stocks, we say you should assume you will earn around 8-10% per year.

If you ask most other investment professionals, they would likely say the same thing.

In fact, from 1926-2017, the annualized return of the S & P 500 Index (1) was 10.2%. This is without any fees.

This means that over the past 92 years, the S & P 500 averaged just over 10% per year.

Amazingly, while it is widely stated that large US company stocks earn around 8-10% per year, the S & P 500 Index has never actually earned between 8-10% in any calendar year since 1926.

For some reason, the S & P Index has not had many years that are actually average. The returns diverge from their own “average.”

In years of discussions and past blog posts, we have explained that the actual year to year returns of the S & P 500 will vary greatly, as some years will be much better than 8-10%, some years will be much worse than 8-10%. Some years will be slightly better or worse than average. And we’ve always said that the future annual returns would not normally be right around 8-10%. But I didn’t know until this week how accurate that statement really was.

The closest actual return to the 8-10% average was in 1993, when the Index returned 10.1%. In 1992, the return was 7.6%.

As the chart (2) below shows, despite the wide dispersion of calendar year S&P 500 Index returns between 1926-2017, the Index has been positive far more years than negative.  There have been 68 positive years and only 24 negative years.  
The year to year variance from the historical 10% average return is the temporary risk that investors in stocks need to be prepared for, in order to reap the long term benefits of stocks, as compared to holding cash, CDs or bonds. The volatility in short term returns is the perceived risk of owning stocks.

As we all know, past performance is no guarantee of future returns.

However, it is important to have reasonable expectations and use evidence (and not forecasts or predictions), to help deal with future uncertainty.

While it is interesting to know that US large company stocks have averaged just over 10% per year over the last 92 years,  and it is an oddity that the Index has never actually returned between 8-10% in any year, the greater lesson is that US stocks, and International stocks as well, move higher more often than they move lower.

If you remain disciplined and adhere to our investment strategy, you should be rewarded, be able to sleep well at night and have a greater sense of financial security.


(1) 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.

(2) Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio.  Past performance is not a guarantee of future results.  S&P data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global.  All rights reserved.

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