What to Expect from the Stock Market

Just about all mainstream personal finance writers advise making stocks the centerpiece of your investment plan. Most will quote a reassuring average market return over a reassuringly long period and make the argument that for sober long-term investors such as yourself, stocks are the place to be. But few writers explain what that long term average return really means and what expectations you should draw from it.

The first thing to understand is that you cannot expect to actually get that average return in any given year. Get Rich Slowly has a guest post by Carl Richards that patiently makes this point with the use of an elaborate animated presentation. His data has an average return of 10% over eighty years and shows that only twice in that time did the actual market return for a year fall between 9% and 11%. I would hope that this is a nearly obvious point to all stock market investors, but I know better.

Moreover, I worry that by saying that the market has good years and bad ones, but that the long run average is high, people are led to believe that as long as they can stick it out through the ups and downs, after twenty years or so they will get the promised average return. This is not necessarily so. Those long run averages are not that much more predictable than individual years.

To illustrate, I will run some numbers of my own. Yale’s Robert Shiller has a website with the S&P 500 index returns annually back to 1871 as well as some other useful stuff such as inflation rates. It turns out that, sure enough, the average return for the US stock market, as measured by the S&P 500, was 10.08% per year over the 138 years from 1871 to 2008 inclusive.

What do we know from this? We know that funds invested in the market on December 31, 1870 and held through December 31, 2008 would have made an average of 10.08% a year. We do not know what the average returns for the next 138 years will be. 10.08% is a pretty solid guess, and in fact is almost certainly the best guess we’ve got, but it’s still just a guess. There is no “true” expected stock market return, even over long periods of time. Setting market return expectations is not science, just thoughtful estimation based on what has happened in the past.

To get a better feel for how volatile even long term averages can be, consider the 80 year period that Richards uses. The 80 year average return for the period ending in 2007 was 11.52%. But move it forward a year to end in 2008 and you get only 10.46%. That is a big difference considering those two periods are 98.75% identical.

And 80 years is a lot longer than the typical person will be invested in the stock market. For most, there is a critical twenty years or so from middle age to retirement when the nest egg does or doesn’t grow. And the returns for twenty year periods are all over the place.

As it happens, the best twenty year period in the stock market since 1871 was recent enough that a lot of us remember it well. From 1979 to 1998 the market averaged 17.32% a year. One dollar invested at the end of 1978 grew to $24.41 by the end of 1998. At the opposite extreme, 1929-1948 averaged only 3.00% a year. The $1 invested at the end of 1928 became only $1.80 by the end of 1948.

There aren’t a lot of people still around who remember the stock market in 1929-1948. But your parents or grandparents might be able to tell you about the period 1962-1981. The market went up an average of 6.57% per year, which doesn’t sound so bad until you find out that inflation averaged 5.50% over the same period, leaving stock investors with an average real return of only 1.07%.

If you are like me, in your mid-forties and heading into the intense period of investing for retirement, the big question is will the period 2009-2028 be more like 1979-1998 or 1962-1981? Nobody knows.

There were 118 twenty year periods ending from 1890 to 2008. The average twenty year period had an average annual return of 9.22%, but a forth of those periods had returns worse than 7% and a fourth beat 11.5%. And you only get to do this once. Consider the difference in circumstances of a person born in 1933, who turned 45 in 1979 and enjoyed fat returns on his way to retirement in 1998 at 65, with somebody born in 1916 whose nest egg went nowhere in the twenty years before his retirement.

What can you do about this? In the most direct sense, nothing. Diversification will help some, but not by as much as you might like. Bad decades for the stock market tend to be bad decades for bonds and real estate too. The truth is that this is one of the many things in life that are beyond your control.

But you can take it into account when doing your financial planning. If the difference between 8% and 10% returns over the next twenty years is the difference between a comfortable retirement and hoping your kids can support you, you need to reconsider your plans. Expecting 10% a year from the stock market over the long run is reasonable, but counting on it is foolish.

categories Economics, Investing, Robert Shiller | | datetime February 14, 2009 8:45 am

217 Comments

  • By good stocks to invest in, January 25, 2011 @ 3:10 pm

    The world market is vast. It continues to expand and many are attracted in penny stocks investment.

    One οf thе key advantage οf penny stocks аrе thаt thеу require minimum capital tο invest wіth.

    Anyway, I love reading your article. Thanks for sharing this.

    Cheers,

Other Links to this Post

  1. promotional items — March 10, 2023 @ 11:28 am

  2. wood stove repair peoria — March 10, 2023 @ 11:35 am

  3. first aid kits — March 10, 2023 @ 1:23 pm

  4. clock accessories — March 10, 2023 @ 2:23 pm

  5. promo products suppliers — March 10, 2023 @ 5:57 pm

  6. Learn More — March 10, 2023 @ 8:06 pm

  7. branded products — March 11, 2023 @ 12:32 am

  8. useful reference — March 11, 2023 @ 12:37 am

  9. bathtub reglazing near me — March 11, 2023 @ 2:26 am

  10. logo printed face masks — March 11, 2023 @ 2:57 am

  11. metal clock mechanism — March 11, 2023 @ 4:30 am

  12. gas fireplace service — March 11, 2023 @ 7:14 am

  13. custom lanyards — March 11, 2023 @ 7:16 am

  14. bathroom tub refinishing — March 11, 2023 @ 9:30 am

  15. badge reels — March 11, 2023 @ 9:54 am

  16. clock hands repair — March 11, 2023 @ 11:34 am

  17. gas fireplace services near me — March 11, 2023 @ 1:49 pm

  18. read more — March 11, 2023 @ 2:04 pm

  19. tub and tile reglazing near me — March 11, 2023 @ 4:33 pm

  20. badge holder — March 11, 2023 @ 4:57 pm

  21. metal clock hands — March 11, 2023 @ 6:37 pm

  22. customized lanyards — March 11, 2023 @ 8:52 pm

  23. click to read more — March 11, 2023 @ 11:35 pm

  24. printed water bottles — March 11, 2023 @ 11:58 pm

  25. DIY clock replacement parts — March 12, 2023 @ 1:41 am

  26. wholesale promotional products — March 12, 2023 @ 6:59 am

  27. replacement parts for clocks — March 12, 2023 @ 8:43 am

  28. custom printed face masks — March 12, 2023 @ 10:01 am

  29. reusable face masks — March 12, 2023 @ 2:00 pm

  30. fireplace repair service near me — March 12, 2023 @ 3:55 pm

  31. water bottles with logo — March 12, 2023 @ 4:39 pm

  32. business gifts — March 12, 2023 @ 9:04 pm

  33. clock mechanisms — March 12, 2023 @ 10:47 pm

  34. custom lanyards — March 12, 2023 @ 11:29 pm

  35. coffee mugs — March 13, 2023 @ 4:14 am

  36. embroidered hats — March 13, 2023 @ 6:24 am

  37. my company — March 13, 2023 @ 10:44 am

  38. corporate gifts — March 13, 2023 @ 1:24 pm

  39. synchronized wireless clock systems — March 13, 2023 @ 4:28 pm

  40. Learn More — March 13, 2023 @ 4:48 pm

  41. imprinted promotional gifts — March 13, 2023 @ 4:48 pm

  42. missoula rv storage — March 13, 2023 @ 7:51 pm

  43. custom surgical masks — March 13, 2023 @ 8:28 pm

  44. best clock movements — March 13, 2023 @ 10:28 pm

  45. badge holder — March 13, 2023 @ 11:05 pm

  46. learn more — March 13, 2023 @ 11:12 pm

  47. Big clock parts — March 13, 2023 @ 11:31 pm

  48. promotional items — March 14, 2023 @ 2:54 am

  49. clock Inserts videos — March 14, 2023 @ 4:57 am

  50. luggage tags — March 14, 2023 @ 5:01 am

  51. read more — March 14, 2023 @ 5:21 am

  52. visit website here — March 14, 2023 @ 5:54 am

  53. car storage near me — March 14, 2023 @ 8:13 am

  54. visit website here — March 14, 2023 @ 9:18 am

  55. luggage tags — March 14, 2023 @ 10:58 am

  56. how to replace clock hands — March 14, 2023 @ 11:21 am

  57. clocks for businesses — March 14, 2023 @ 11:30 am

  58. clock making replacement parts — March 14, 2023 @ 12:07 pm

  59. visit website here — March 14, 2023 @ 3:48 pm

  60. embroidered hats — March 14, 2023 @ 5:05 pm

  61. learn more — March 14, 2023 @ 5:54 pm

  62. clock dial face fit ups — March 14, 2023 @ 6:01 pm

  63. clock Inserts videos — March 14, 2023 @ 6:49 pm

  64. custom printed signage — March 14, 2023 @ 11:01 pm

  65. logo face masks — March 14, 2023 @ 11:43 pm

  66. sync system clock — March 15, 2023 @ 12:57 am

  67. Big clock parts — March 15, 2023 @ 1:20 am

  68. clock accessories — March 15, 2023 @ 2:05 am

  69. missoula car storage — March 15, 2023 @ 4:20 am

  70. read more — March 15, 2023 @ 6:09 am

  71. outdoor clocks for business — March 15, 2023 @ 8:07 am

  72. metal hands — March 15, 2023 @ 8:49 am

  73. first aid kits — March 15, 2023 @ 12:35 pm

  74. branded face masks — March 15, 2023 @ 7:01 pm

  75. tradeshow signs — March 15, 2023 @ 9:17 pm

  76. innovation wireless systems — March 15, 2023 @ 10:27 pm

  77. metal hands — March 15, 2023 @ 11:28 pm

  78. best motor for clocks — March 16, 2023 @ 12:12 am

  79. tote bags — March 16, 2023 @ 1:29 am

  80. imprinted promotional gifts — March 16, 2023 @ 4:42 am

  81. Facility wireless clocks — March 16, 2023 @ 5:36 am

  82. indoor rv storage near me — March 16, 2023 @ 7:52 am

  83. Clock kits and dials — March 16, 2023 @ 7:56 am

  84. Learn More — March 16, 2023 @ 12:08 pm

  85. outdoor clocks for business — March 16, 2023 @ 12:47 pm

  86. Big clock parts — March 16, 2023 @ 1:50 pm

  87. read more — March 16, 2023 @ 2:13 pm

  88. storage units for rent — March 16, 2023 @ 2:49 pm

  89. best motor for clocks — March 16, 2023 @ 3:24 pm

  90. wireless time systems — March 16, 2023 @ 8:10 pm

  91. branded products — March 16, 2023 @ 8:35 pm

  92. time movement hands — March 16, 2023 @ 9:09 pm

  93. boat storage — March 16, 2023 @ 9:49 pm

  94. parts of a clock — March 16, 2023 @ 10:59 pm

  95. get more info here — March 17, 2023 @ 2:50 am

  96. synchronized wireless clock systems — March 17, 2023 @ 3:22 am

  97. monument lake resort americana music festival — March 17, 2023 @ 8:01 am

  98. badge reel holder — March 17, 2023 @ 10:25 am

  99. sync system clock — March 17, 2023 @ 10:41 am

  100. Clock making parts — March 17, 2023 @ 12:20 pm

  101. luggage tags — March 17, 2023 @ 3:38 pm

  102. indoor rv storage near me — March 17, 2023 @ 6:36 pm

  103. best clock movements — March 17, 2023 @ 7:51 pm

  104. DIY clock replacement parts — March 17, 2023 @ 9:22 pm

  105. get more info here — March 18, 2023 @ 1:04 am

  106. synchronized clocks for stadiums — March 18, 2023 @ 1:29 am

  107. clock building videos — March 18, 2023 @ 3:20 am

  108. reusable face masks — March 18, 2023 @ 4:08 am

  109. metal clock mechanism — March 18, 2023 @ 4:46 am

  110. branded products — March 18, 2023 @ 8:11 am

  111. missoula car storage — March 18, 2023 @ 8:19 am

  112. get more info — March 18, 2023 @ 8:35 am

  113. clock Inserts videos — March 18, 2023 @ 11:50 am

  114. Printed Gear — March 18, 2023 @ 3:15 pm

  115. Building management services — March 18, 2023 @ 3:46 pm

  116. read more — March 18, 2023 @ 4:31 pm

  117. clock movement — March 18, 2023 @ 5:40 pm

  118. missoula rv storage — March 18, 2023 @ 9:30 pm

  119. metal water bottles — March 18, 2023 @ 10:42 pm

  120. GPS Receiver — March 18, 2023 @ 11:07 pm

  121. clock movement — March 19, 2023 @ 1:59 am

  122. caveman music festival — March 19, 2023 @ 3:06 am

  123. mini storage — March 19, 2023 @ 4:11 am

  124. water bottles with logo — March 19, 2023 @ 5:28 am

  125. clock making replacement parts — March 19, 2023 @ 7:51 am

  126. see it here — March 19, 2023 @ 10:27 am

  127. trailer storage — March 19, 2023 @ 10:58 am

  128. promo items — March 19, 2023 @ 11:02 am

  129. Best digital clocks — March 19, 2023 @ 1:48 pm

  130. clock accessories — March 19, 2023 @ 2:58 pm

  131. clock parts manufacturing — March 19, 2023 @ 4:03 pm

  132. coffee mugs — March 19, 2023 @ 5:10 pm

  133. weston colorado americana festival — March 19, 2023 @ 5:40 pm

  134. custom printed face masks — March 19, 2023 @ 7:36 pm

  135. wireless time systems — March 19, 2023 @ 9:08 pm

  136. clock inserts movements — March 19, 2023 @ 10:02 pm

  137. time movement hands — March 19, 2023 @ 11:12 pm

  138. missoula self storage — March 20, 2023 @ 1:08 am

  139. branded products — March 20, 2023 @ 2:46 am

  140. sync clocks for hospitals — March 20, 2023 @ 4:32 am

  141. storage units near me — March 20, 2023 @ 8:29 am

  142. Printed Gear — March 20, 2023 @ 10:56 am

  143. hospital clock system — March 20, 2023 @ 11:58 am

  144. storage missoula mt — March 20, 2023 @ 3:59 pm

  145. accessories for clocks — March 20, 2023 @ 6:51 pm

  146. clocks for facilities — March 20, 2023 @ 7:28 pm

  147. imprinted safety glasses — March 20, 2023 @ 10:48 pm

  148. storage missoula — March 20, 2023 @ 11:25 pm

  149. custom lanyards — March 21, 2023 @ 12:16 am

  150. clock mechanisms — March 21, 2023 @ 1:42 am

  151. see it here — March 21, 2023 @ 6:03 am

  152. rv storage missoula mt — March 21, 2023 @ 6:48 am

  153. time movement hands — March 21, 2023 @ 8:33 am

  154. clocks for hospitals — March 21, 2023 @ 9:52 am

  155. read more — March 21, 2023 @ 10:34 am

  156. imprinted safety glasses — March 21, 2023 @ 4:23 pm

  157. synchronized wireless clocks for sale — March 21, 2023 @ 4:57 pm

  158. monument lake resort caveman music festival — March 21, 2023 @ 8:19 pm

  159. public storage near me — March 21, 2023 @ 9:34 pm

  160. badge reels — March 21, 2023 @ 9:53 pm

  161. imprinted promotional gifts — March 21, 2023 @ 10:16 pm

  162. clock building videos — March 22, 2023 @ 12:43 am

  163. custom printed signage — March 22, 2023 @ 4:17 am

  164. indoor rv storage near me — March 22, 2023 @ 4:55 am

  165. Learn More — March 22, 2023 @ 5:08 am

  166. outdoor clocks for schools — March 22, 2023 @ 7:21 am

  167. small clock inserts — March 22, 2023 @ 12:03 pm

  168. self storage units near me — March 22, 2023 @ 12:19 pm

  169. wireless time clocks — March 22, 2023 @ 2:36 pm

  170. clock motor suppliers — March 22, 2023 @ 6:55 pm

  171. car storage missoula — March 22, 2023 @ 7:43 pm

  172. custom printed signage — March 22, 2023 @ 8:05 pm

  173. public address transmitter software — March 22, 2023 @ 9:41 pm

  174. how to build your own clock — March 22, 2023 @ 10:08 pm

  175. clock motor suppliers — March 23, 2023 @ 1:42 am

  176. coffee mugs — March 23, 2023 @ 3:20 am

  177. Printed Gear — March 23, 2023 @ 4:03 am

  178. learn more — March 23, 2023 @ 4:43 am

  179. clock mechanisms — March 23, 2023 @ 5:07 am

  180. time movement hands — March 23, 2023 @ 8:30 am

  181. trailer storage near me — March 23, 2023 @ 10:21 am

  182. luggage tags — March 23, 2023 @ 10:44 am

  183. wireless time clocks — March 23, 2023 @ 11:58 am

  184. quartz clock fit-ups — March 23, 2023 @ 12:19 pm

  185. clock making replacement parts — March 23, 2023 @ 3:27 pm

  186. wireless time systems — March 23, 2023 @ 9:33 pm

  187. clock movement — March 23, 2023 @ 10:02 pm

  188. how to build your own clock — March 23, 2023 @ 10:28 pm

  189. gas fireplace cleaning services — March 23, 2023 @ 11:06 pm

  190. tub reglazing los angeles — March 24, 2023 @ 1:35 am

  191. clock repair videos — March 24, 2023 @ 6:37 am

  192. chimney repair peoria — March 24, 2023 @ 6:56 am

  193. bathroom tile reglazing — March 24, 2023 @ 9:00 am

  194. tub tile reglazing — March 24, 2023 @ 4:15 pm

  195. clock dial face fit ups — March 24, 2023 @ 8:58 pm

  196. fireplace repair companies near me — March 24, 2023 @ 9:58 pm

  197. ceramic tile refinishing cost — March 24, 2023 @ 11:08 pm

  198. outdoor clocks for schools — March 25, 2023 @ 2:54 am

  199. fireplace repair service near me — March 25, 2023 @ 5:29 am

  200. metal clock mechanism — March 25, 2023 @ 6:02 am

  201. reglazing bathtub — March 25, 2023 @ 6:08 am

  202. clock synchronization wirelessly — March 25, 2023 @ 10:08 am

  203. clock repair parts — March 25, 2023 @ 11:54 am

  204. fireplace maintenance gas — March 25, 2023 @ 12:55 pm

  205. how to replace clock hands — March 25, 2023 @ 1:46 pm

  206. refinishing floor tile ideas — March 25, 2023 @ 8:08 pm

  207. Check It Out Here — March 26, 2023 @ 12:21 am

  208. time movement hands — March 26, 2023 @ 2:43 am

  209. tub reglazing los angeles — March 26, 2023 @ 3:17 am

  210. useful reference — March 26, 2023 @ 4:11 am

  211. clock repair videos — March 26, 2023 @ 4:58 am

  212. PA systems for schools — March 26, 2023 @ 7:32 am

  213. Clock kits and dials — March 26, 2023 @ 10:09 am

  214. reglazing tub and tile — March 26, 2023 @ 10:28 am

  215. fireplace repair near me — March 26, 2023 @ 11:53 am

  216. public address transmitters — March 26, 2023 @ 2:52 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

WordPress Themes