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Whenever there’s a period of extreme market volatility, new investors might wonder if it’s really worth keeping their money in the stock market at all.
This was especially true in the first half of 2022 when stocks entered a bear market after the Federal Reserve began tightening monetary policy.
Dump the doubt. Over the long term, stocks are a worthwhile investment for most people, with one caveat: Be prepared to handle the inevitable speed bumps along the way.
Don’t believe us? Consider the following data on the average stock market returns.
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Average Stock Market Return for the S&P 500
Average stock market returns depend on which period you measure and the index used to represent the U.S. market.
The index of choice in most cases is the S&P 500. It’s a useful proxy, but it has only been around since 1957. Fortunately, you can use data from Nobel Prize-winning economist Robert Shiller to approximate the S&P 500.
Using Shiller’s data, since 1971 the S&P 500 has delivered an annualized return of 7.58%—or 10.51% with dividends reinvested.
Investors who keep their money at work in the S&P 500 have been able to enjoy an annualized stock market return of around 10% over the long haul.
That doesn’t mean you can expect a 10% return every year. Some years stocks are up, whereas they fall in others. An annualized return is just an average earned over a period of time.
How Long Does It Take an Investment to Double in Value?
How quickly an investment doubles depends on the rate of return. To illustrate the point, let’s say you put $10,000 into an S&P 500 index fund. How long will you have to wait before it turns into $20,000?
A common rule of thumb, the rule of 72, states that you can know how long it’ll take for your investment to double by dividing 72 by the rate of return.
A 10% annual return means your money should double every 7.2 years. This can be a powerful investment insight, a real-life version of the “grain of rice” folktale.
Under the “doubling every seven years” model, if you had put $10,000 into an investment with a 10% annual return in the year 1995, you would have had roughly $20,000 by 2002, $40,000 by 2009, and $80,000 by 2016. You would also be looking at $160,000 by next year—without adding another dollar.
How long has it historically taken a stock investment to double?
NYU business professor Aswath Damodaran has done the math. According to his math, since 1949 S&P 500 investments have doubled ten times, or an average of about seven years each time.
In some cases, like 1952 to 1955 or 1995 to 1998, the value of the investment doubled in only three years. In other cases, investors had to be much more patient. Investors in 1928, for instance, had to wait until 1950 for their portfolio to double.
One caveat: These calculations don’t include transaction fees, which can cut into returns. Historical data doesn’t map exactly to the price of a share that a trade might have been able to buy during a particular trading day in the past. Rather, they are an average closing price for a month. As such, there has been some rounding.
Can You Lose Money in Stocks?
Take a relatively recent example from Damodaran’s data: Remember that $100 invested in 1928? By 1999, that investment jumped to a little more than $155,000. A decade later, though, that same investment declined to about $142,000, even with reinvested dividends.
Thanks to the dot-com crash and the Great Recession, the 2000s were essentially a lost decade for investors.
All instances of declines weren’t as dramatic as that terrible decade.
In the 94 years covered by Damodaran’s data, there were 25 years that saw the value of S&P 500 investments drop. That’s a roughly 1-in-4 chance of losing money in stocks in any given year.
In 19 of those years, the loss was more than 5%.
On the plus side, there are a lot of winning streaks. There would have to be for investors to enjoy an annualized return of 10% over the long-term.
Returns were greater than 10% in almost 60% of the years covered in Damodaran’s data. That’s better than a 1-in-2 chance of double-digit gains during any given year.
How Much Can You Earn With Stocks?
There’s a reason why financial advisors want so much of your wealth to be tied up in the future cash flows of publicly-traded companies.
Damodaran found that $100 invested in 1928 would have been worth:
- $1,000 by the mid-1950s.
- $10,000 by the mid-1980s.
- $100,000 by the turn of the century.
- Nearly $750,000 by the end of 2021.
In very rough terms, $100 became about $1 million in 100 years.
That same $100 invested in:
- U.S.Treasury bonds would net about $8,500.
- Corporate bonds would net about $55,000.
- Real estate would net $5,000.
If you have the time to endure years of losses, there has been no better long–term investment than a well-diversified portfolio of high-quality stocks.
What’s Your Investing Time Horizon?
So, long-term investing is powerful, which should calm your nerves when bumpy times arise. But it’s important to understand what is meant by “long term.”
Unfortunately, many people think it means a year or two. Not true.
If you want to feel good about expecting a 10% market return, that means thinking more in decades than in years. But don’t be discouraged. Your downside risk is a decade or so of smaller returns, and your upside is doubling every four or five years.
Still, very bad market years do happen. No one who needs money in the next five years or so should have those funds invested aggressively in the stock market. People in their 60s, and perhaps even in their 50s, should start thinking about backing away from such volatility.
Anyone who retired between 2000 and 2002, for example, without doing so, found their retirement kitty cut by up to a third, learning this painful lesson the hard way.
But if time is on your side, market fluctuations like what we’re seeing now shouldn’t phase you.
We can’t promise when this stretch of volatility will end. The pandemic market shock came and went in a couple of months, and the 1970s bear market lasted almost two decades. But over the long haul, you can expect your investments to grow at about 10% a year, doubling every seven years or so.