The Rewarding Distribution of US Stock Market Returns
In this video, we review a compelling graph that details the historical frequency of positive US stock market returns. We learn how rewarding the distribution of these returns over the last century has proven to be for those willing to pay the price of short-term volatility.
Video Transcript:
We have recently revisited the lows in the stock market from last quarter, with the S&P 500 down around 15% and the Nasdaq down over 20%. So, I wanted to give some context as to how Rewarding the Distribution of US Stock Market Returns has proven to be in the long run.
Annual stock market returns are unpredictable, but what gives me confidence, is that up years occur far more frequently, than down years in the US. This should be reassuring, especially if you find this current market downturn unsettling.
What we are looking at here are US stock returns from 1926 – to 2021, so a pretty good sample size. On the left, we have all the negative years, and on the right the positive. What this tells us is that the US posted positive returns in 75% of the years, or to say it another way – there is a ¾ chance in any given year that the market ends up positive. Now that’s only over a one-year period. What if we were to stretch this over a 5-year period, well your probability of making money jumps to almost 9/10.
Another interesting data point is that the market gained an annualized average of 10.2% over those roughly 100 years, yet nearly 2/3rds of years were at least 10 percentage points above or below this average, meaning average returns or anything but average!
One more noteworthy trend is more than two-thirds of the down years were followed by up years. The most recent example would be a 5% loss in 2018, followed by an over 30% gain in 2019.
And while this year’s volatility may seem out of the ordinary, in reality, the average peak-to-trough decline in the market is about 14%, which is right around where we are sitting right now. The current risk-du jour in the markets obviously exacerbates the volatility, and we believe that it will remain for at least the next few quarters.
Now, I could make a 30min video going over all the different factors impacting markets right now, and I try to save that for my quarterly reviews - but all in all the key takeaway is this – the stock market tends to reward investors who can weather the annual ups and downs and stay committed to a long-term plan. Stocks have returned roughly 10% a year over the last 100 years, and there’s a price to pay for that performance. And we are all paying that price now and living through it, but I find nearly a century of market data to be extremely reassuring because it's proven that those willing to pay the price will be rewarded in the long term.
Please don’t hesitate to reach out with any questions, and also know I’m keeping an eye on things and taking advantage of this volatility for our clients.
As always, stay on point, and stay the course. Take care.
