A guest post from Dimensional – The Uncommon Average

I have found that the importance of having an investment philosophy—one that is robust and that you can stick with— cannot be overstated.” 

David Booth

The world stock market has delivered an average annual return of around 10% since 1988*.  But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average? To answer this question, we have looked at the US stock market which has a much longer track record and has also delivered an average annual return of around 10% since 1926**. 

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. For investors, this data highlights the importance of looking beyond average returns and being aware of the range of potential outcomes.

Exhibit 1.    S&P 500 Index Annual Returns
1926–2016
 


In US dollars. The S&P data are provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is not a guarantee of future results. Performance may increase or decrease as a result of currency fluctuations.

TUNING IN TO DIFFERENT FREQUENCIES
Despite the year-to-year uncertainty, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. 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, investors’ odds improve over longer time horizons. 

Exhibit 2.    Frequency of Positive Returns in the S&P 500 Index
Overlapping Periods: 1926–2016


 
From January 1926–December 2016 there are 913 overlapping 15-year periods, 973 overlapping 10-year periods, 1,033 overlapping 5-year periods, and 1,081 overlapping 1-year periods. The first period starts in January 1926, the second period starts in February 1926, the third in March 1926, and so on. In US dollars. The S&P data are provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Past performance is not a guarantee of future results. Performance may increase or decrease as a result of currency fluctuations.


CONCLUSION
While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, having an understanding of how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. Financial advisers can play a critical role in helping investors sort through these and other issues as well as keeping them focused on their long term goals. 



 *As measured by the arithmetic average of calendar year returns of the MSCI All Country World Index (gross div.) from 1988 to 2016. MSCI data © MSCI 2017, all rights reserved.
  **As measured by the S&P 500 Index from 1926–2016. S&P data provided by Standard & Poor’s Index Services Group.


This article should not be considered investment advice or an offer of any product for sale, it  does not contain the opinions of the author but data obtained from Dimensional Fund Advisors. It does not represent a recommendation of any particular, strategy or investment product. Information contained has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not an indicator of future results.

Share this post

Share on facebook
Share on twitter
Share on linkedin
Share on print
Share on email

Coronavirus (COVID-19)

BUSINESS AS USUAL

Blackdown Financial update – 11th May 2020

Based on ongoing government advice, we at Blackdown Financial continue to work remotely for the present.

We continue to offer all clients a full and seamless financial and mortgage service.

Video conferencing has replaced all face to face meetings, which has proven to be a successful and safe alternative means of communication.

We welcome all new enquiries on a free of charge no obligation initial meeting.

Please feel free to contact us on our main number 01823 321616 or email enquiries@blackdownfinancial.co.uk to discuss your financial or mortgage needs.