The Reality of Market Returns

On average, stocks have yielded about 10% annually. Yet, in the past century, the S&P 500 has only reached returns between 8% and 12% six times. The market has seen astonishing gains of up to +54% and devastating losses of -43%. Even in years where returns are positive, significant intra-year declines are common. Stay with us to discover why long-term investors are rewarded for weathering this volatility.

The Misleading Nature of Average Returns

If you were unfamiliar with the stock market, would you interpret the historical data as a clear indication that the S&P 500 has averaged around 10% returns over the last century? Most likely not. In fact, during the past 97 years, the U.S. stock market has only approached the 10% average six times.

While good years may yield returns of 20%, the downturns can be equally severe. Fortunately, the market has experienced more positive years (69) than negative ones (25), which accounts for the historical average of 10%.

The Pain of Volatility

As noted in my book, The Rational Investor, volatility—especially extreme volatility—is the norm, not the exception, in the stock market. It is exceedingly rare for the market to rise steadily for an entire year without experiencing significant dips.

Ongoing research from Dimensional Fund Advisors emphasizes the reality of substantial drops in the market, even in favorable years.

For instance, in 2010, a seemingly impressive return of 17% belies the underlying turmoil, as the market had previously plunged by as much as 16% that same year. This was also the year of the notorious "Flash Crash," where the Dow Jones suffered a 9% loss in a single hour but remarkably recovered 70% of that loss by day’s end.

From 2002 to 2021—a timeframe that encompassed events like 9/11, the dot-com crash, the financial crisis, and COVID-19—the market delivered an average return of 11% per year, with intra-year drops averaging 15%.

The Importance of Perspective

Despite the volatility, there’s a silver lining: as you broaden your perspective, the daily market fluctuations become less overwhelming.

Below are some snapshots that illustrate the returns of the S&P 500 over various timeframes:

• One day:
• One year:
• Ten years:
• Thirty-nine years:

For long-term investors, the real challenge lies in shifting focus from short-term fluctuations to long-term trends.

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This article serves informational purposes only and should not be regarded as financial or legal advice. Always consult a financial professional before making significant financial decisions.