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Knowing the history of the stock market is one of the best ways to feel comfortable about your investments.
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Real estate investor and media personality Graham Stephan recently tweeted, “Don’t invest in the market expecting every year to produce the ‘average returns’ of 10%. Some years, you get 40%. Some years you get -15%. The only way to hit the average is to invest long-term!”
It appears that Stephan is using the average annual returns of the S&P 500. While some estimates put this number slightly higher and some slightly lower than 10%, it’s safe to say that 10% is a fair average.
Stephan’s audience
Given that Stephan is only 32 years old, it’s no surprise that many of his followers skew young. And for many young adults, stories about the stock market surround the Great Recession of 2008 and the pandemic-related stock drop of 2020. In other words, they don’t have a lot of cheery memories from which to draw. It’s easy to fall into the trap of believing that there must be a better way to build wealth — and to build it quickly.
A graphic illustration
Stephan’s point about investing in the market is this: It’s the investors who adopt a buy-and-hold strategy who average 10% returns over the long term. To illustrate this point, Stephan provided a chart showing S&P 500 annual returns from 1926 through 2020. In the 94 years the chart covers, annual returns fell into the negative 25 times. Returns were positive in 69 out of 94 years.
Viewing annual returns as dots on a chart is a simple but impressive way to recognize four things:
How often the market has made gains rather than suffered losses.How much more dramatic the gains have been compared to the losses.How the market has historically rebounded after each drop.How clear it is that selling off during “down” periods is a sure way to miss out on gains.
Historical support
Hartford Funds put an impressive amount of work into compiling statistics regarding the ups and downs of the stock market since its early days. What Hartford Funds found underscores Stephan’s assertion that standing firm is the best way to enjoy market gains.
Bear markets
When the market drops in value by 20% or more, it’s considered a bear market. On average, stocks lose 36% of their value during a bear market, and that’s when investors get nervous. However, stocks gain an average of 114% once the market rebounds, and we move into bull market territory.
Selling when the market is dropping is the surest way to miss gains as the market rebounds.
The news is nerve-wracking
As of this writing, there is news that the Dow has dropped 500 points. It certainly makes investors nervous, but for the most part, the daily peaks and valleys mean little. If you were to start investing today and kept at it for 50 years, you can expect to live through approximately 14 bear markets. When averaged, each bear market in U.S. history has lasted just shy of 10 months.
On the flip side, the average bull market lasts around 2.7 years. And yet the nerve-wracking nature of the news drives some investors to dump their investments before they have time to appreciate.
Regardless of how Stephan’s followers reacted to his tweet, history backs him up.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
