As financial planners we spend a lot of time looking at portfolio returns. One of the most important things we can do when analyzing these returns is to maintain perspective. This means keeping in mind how long-term averages and goals are achieved and reminding ourselves what accomplishing these return goals can look like over short periods of time.
A great example to look at is the S&P 500. In the 89 years since 1928 the S&P has annualized a 9.7% return. To most of us, that return sounds great. What few of us see, however, is what went into that healthy number. In those years the S&P has only had an annual return within 3% of that number an astonishing 7 times. That’s 7 times that it’s been between 7% and 13%.
Also, en-route to that return the S&P has had negative years 26% of the time. Also a surprising number. So, how does anyone make money if you’re down once every 4 years on average?
Good long term returns are had by staying patient.
In that time frame the market has only had 16 ten-year periods out of 79 that have returned below a 6% average, and 4 of those were negative from the Great depression and recession. Those are pretty good odds that giving the market time will result in reasonable returns. This is why it is so important to stay the course with your investments to allow them the chance to get you to the returns you may expect from them.
**All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.