Daily Traders Edge

Stock Market Returns Are Anything But Average

April 30
11:04 2021

A reader asks:

Ben, I believe you have written at least once about how surprisingly few times the stock market has grown near its long-term average in a given year. In other words, its typical annual returns are well above its long-term ~10% average, or well below. I’m searching for it on your blog site and cannot find it.  Would you mind pointing me in the right direction?

From 1926-2020, the average return for the U.S. stock market was basically 10% per year.

Investing in the stock market would be way easier if you could simply bank on 10% year in and year out. Unfortunately, it doesn’t work that way.1

If stock market returns were consistent each year, there would be no risk. If there was no risk to investing in the stock market, the stock market wouldn’t offer such attractive returns.

It’s the Catch-22 of investing in risk assets.

If you want consistency over the long haul, you have to accept lower returns. And if you want higher returns over the long haul, you have to accept more volatility.

You can never truly escape risk, just change how you accept it.

This volatility is easily observable when looking at the year-to-year returns on the U.S. stock market:

Returns are all over the map. No consistency whatsoever. Good luck predicting what’s going to happen from one year to the next.

Here’s another way of viewing returns over time by different return buckets:

The most returns over the past 95 years have fallen into the 10% to 20% range. But it’s worth pointing out how few returns fall within the range around the long-term 10% average.

If we look at the calendar year returns plus or minus 2% from the 10% average (so 8% to 12%) this has happened in just 5 calendar years. So around 5% of all years since 1926 have seen average returns. In fact, there have been just as many yearly returns above 40% as returns in the 8% to 12% range.

Continue Reading at A Wealth of Common Sense

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