The Trouble With Averages

The US stock market has delivered an average annual return of about 10% since 1926. But short-term results don’t tell that story. In fact, in any given period, stock returns can be positive, negative, or flat. So it’s helpful to your peace of mind to look the range of historical outcomes.

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 had a return within this range in only six of the past 91 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. This data highlights the importance of looking past average returns and being aware of the range of potential outcomes.

Despite the year-to-year uncertainty, we can potentially increase the chances of a positive outcome by maintaining a long-term focus on long-term assets (those you don’t need for spending for at least five years). Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, 10, and 15 years in the US market. The data shows that, while positive performance is never assured, the odds are better over longer time horizons.

While many find it easy to stay the course in years with above-average returns, periods of disappointing results may test your faith. Being aware of the range of outcomes in the short term can help you remain disciplined, which in the long term can increase the odds. What can help calm you during the ups and downs? There is no silver bullet, bit having an understanding of how markets work is a good starting point. The asset allocation that aligns with your personal needs and investment goals is imperative – your short-term needs should never be invested in the volatile stock markets. As we always say, keep focused on your goals.

Blue Spark Capital Advisors

We're a fee-only Registered Investment Advisory and financial planning firm based in New York City and the Berkshires.

We specialize in working with women after divorce, death of a spouse, or other life transitions such as retirement or job change. We provide financial planning and investment management services.

We believe in a holistic approach. Movement in each piece of your financial plan impacts the others, so we consider your entire picture.


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"Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful."
– Samuel Johnson (1709-1784)