Over the past 91 years, the benchmark for US large cap stocks, the S&P 500 or similar indexes, have returned an average of 9.49% when accounting for price and dividends1. However, if that’s the return you expect on a regular basis, you would be misled. First, you cannot invest directly in an index like the S&P 500. Second, over that time period the annual returns have ranged from -43.8% to positive 52.6%. In only 9 of the years was the total return between 5% to 10% and only 3 times did it range from 7% to 10%.1
If you were invested in a similar fashion during this time period you would have had to make some serious decisions in order to get a similar average annual return.
You would have needed -
- To have no need for the money so that it could stay invested.
- To hold on through some painful periods like the Great Depression, the Dot Com Crash, and the Financial Crisis.
- To not get greedy and invested more at market peaks.
Those three needs and behaviors are often much harder to achieve in practice. Each person has a very unique risk tolerance that should be evaluated before deciding how to invest.
- Damodaran , Aswath. “Annual Returns on Stock, T.Bonds and T.Bills: 1928 - Current.” Welcome to Pages at the Stern School of Business, New York University, 5 Jan. 2019, pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html.
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized investment, tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing. You cannot invest directly in an index. The raw data for Treasury bond and bill returns is obtained from the Federal Reserve database in St. Louis (FRED). The return on stocks includes both price appreciation and dividends. The Treasury bill rate is a 3-month rate and the Treasury bond is the constant maturity 10-year bond, but the Treasury bond return includes coupon and price appreciation. It will not match the Treasury bond rate each period1.