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It always feels bittersweet when the holidays end.
I love Christmas time. ornaments. party. food. movie. family time.
But I also have something to look forward to when the kids finally go back to school after the Christmas break. It is to update historical stock market data.
When it comes to past performance numbers, I rely heavily on two sources. DFA return 2.0 and New York University annual return numbers.
This is a scatter plot of calendar year earnings that I update annually, going back to 1926.
I like this chart because it shows how random the stock market is over the year. big profit. Big loss. It’s all over the place. It’s like taking a random walk down Wall Street.
If you’re looking for consistency, the stock market isn’t the place to be.
Or is it?
Returns are certainly inconsistent in the short term.
However, if you extend the time horizon, long-term returns will be relatively stable.
These are the annualized returns of the S&P 500 through the end of 2023 for various time periods.
Not bad, right?
Even taking into account the bear market in 2022 and the coronavirus crash in early 2020, the five-year outlook remains bleak.
But look at how consistent the annual returns have been over several decades. We can’t promise that these returns will continue to be the same, but this is why you should think long-term when investing in the stock market.
So many terrible things have happened over the years: wars, recessions, financial panics, etc., but the historic return numbers bake them all into a cake and prove to be amazing.
Of course, even over a 10-year period, stock market returns were below average. You don’t get such great long-term returns without some risk.
The year 2000 is probably the worst entry point in U.S. stock market history, at least from a valuation perspective. Since the beginning of the year, the S&P 500 is up just under 7% annually. It’s not terrible, but it’s below average.
In fact, it’s likely the worst 30-year return in modern history for the U.S. stock market since 2000.
The worst 30-year return in the past 100 years was 8% per year from the peak in September 1929.1 Dotcom’s peak will pay off in return.
For the S&P 500 to achieve an 8% return over 30 years, it would need to return 12% annually from 2024 to 2029. If the annual rate of return is 10%, the annual rate of return for 30 years is 7.6%. If it was 8%, it becomes 7.2%.
Most of the time, ratings aren’t important, but sometimes they are.
The good news is that most investors won’t invest all their money at the same time at the peak of a huge stock market bubble. People invest regularly from their paychecks.
Contribute on a weekly, monthly, quarterly, or annual basis. Perform a rebalance. Change your asset allocation. Sell some of your assets to use that money.
But even if you’re the worst market timer in the world, a 7% annual return over 20 to 30 years isn’t that bad.
At a rate of return of 7% per year over 20 years, your total return is almost 300%.
7% over 30 years means you’ll see a total return of nearly 700%.
While an annual return of 6.9% from 2000 to 2023 may seem insignificant, it still represents a total return of 410% for the S&P 500, including dividends.2
We don’t know what kind of return we will get in the future. People have been predicting lower returns for some time, but that hasn’t happened yet. It will happen someday. However, we don’t know when or how long that will last.
Regardless of what your returns are from here, you’re on your side in the stock market in the long run.
Anything can and will happen in the short term. Compound interest occurs over the long term.
Success in the stock market is given only to patient people.
References:
Updated My Favorite Performance Charts of 2023
1Considering that the market crashed about 85% during the Great Depression, it’s amazing that the stock market was up 8% a year during that period.
2After a lost decade for the stock market from 2000 to 2009, we entered the 2010s and at this point no one could believe that returns in the 21st century were so high.
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