Market Returns

excel chartIn my previous post, I mentioned that in the end, you will make money through a buy-and-hold strategy. There will be volatility, the worst of which will be short-term. Over the long run, the stock market is an excellent place to build wealth. But you have to stay invested, even when everyone is telling you the sky is falling.

Here is a quick quiz for you: we all know the past four years have been hard on the economy. The housing bubble burst and the value of homes tanked. The stock market dropped in 2008 by over 35%! People lost their jobs. Every day the news reports seemed to paint a picture that was bleaker than the previous day. But, from 2008 through 2011, which is four years, how many of those years did the stock market have a negative return? I’ll give you a second to think it over.

Many people would most likely answer three years. At least that is the answer most people responded with when I asked them personally. The actual number of years the stock market was down in the past four: once in 2008. Below are the returns for each year:

2008 -36.7%
2009 28.8%
2010 17.9%

2011 0.8%

Based on the gut-wrenching stories the news reports on, you would think that the market was down every year in the past four years. But it has not. Even as depressing as the news has been, the market has been positive every year since 2008. The point is that the market always comes back. It has never dropped to zero. If it does, we have a lot more than money to worry about.

Take a look at the chart below. It shows the annual return of the total U.S. stock market each year from 1926 through 2011.

Looking at it we see two things:

  • The chart is a bell curve, meaning that for the most part, there is a general percentage return that the market earns in a given year. Years like 2008 (black box, far left) are an anomaly.
  • The second thing to realize is the market gains (has a positive return) 76% of the time. That’s three out of every four years. Coincidentally, in the past four years, the market is up three of the four years.

The point I am trying to make is that there is short-term volatility in the market. There will be large swings higher and lower. In the end, the stock market will rise higher. But that is in the long term. In the meantime, you will need to learn to become comfortable with the daily swings, knowing that in the long run, the market will be higher.

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Jon Dulin

Hi, my name is Jon and I run Penny Thots. I blog about many personal finance topics, but my specialties lie in investing, paying off debt, and career goals. I also blog at Money Smart Guides.
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  1. Mary says

    Great article Don! Truth is in the numbers and the pictures, isn’t it?

    Matt, I don’t think it’s so much that the naysayers don’t understand…’s that if there was a truly rosy picture, there wouldn’t be any NEWS. Think about it, does much of anything good make the news….:-)

    • says

      I agree. Anymore, the news seems as though it is there to incite a reaction out of the viewer. They report on how the market dropped X% today and how much the average investor lost in their 401(k) because of it. You never hear, “but, in the past 20 years, you earned X%”. It’s disappointing when you realize that you have to question the motives of the news.
      MoneySmartGuides recently posted..Revisiting The Buffett RuleMy Profile

  2. Amy says

    What an eye opening post! I, too, fell for what the new was reporting and believed things were bleaker than they really are. Thank you for your honest reporting and encouraging all of us to seek the truth, rather than just believe what we are being told!

    • says

      It’s easy to fall for what the news is reporting. They use graphics and pictures of people in distress when the market is falling. And they interview people telling you the sky is falling, even though the odds of the scenario they are describing is not very likely to occur.
      MoneySmartGuides recently posted..Revisiting The Buffett RuleMy Profile

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