Investing

2019's stock market highs are a good reminder to invest for the long term

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It's been a hot year for the U.S. stock market, with the S&P 500 surging more than 20% as of July 30.

To appreciate just how great 2019 has been thus far, take a look at some of the market's achievements:

  • The S&P 500 had its best first half of a year since 1997.
  • Measured by closing prices, that benchmark index has hit 13 record highs.
  • For the first time ever, the S&P 500 crossed 3,000 and the Dow Jones Industrial Average surpassed 27,000.
  • There have been only seven days this year when the S&P 500 has fallen by at least 1%.

If you're invested in an index fund — either a mutual fund or an exchange-traded fund (ETF) — that tracks the S&P 500, you may feel like celebrating. Still, it's important to keep perspective: Stock prices are up so much this year partly because of a late-2018 slump that saw the S&P 500 end the year down 6.2%.

How 2019 compares to past years

The S&P 500's year-to-date returns make 2019 so far the fourth best of the past 20 years. That's saying something, considering that the past decade has been one of the best periods ever to be an investor, with gains in all but two of those years.

The long-term historical average annualized return for the S&P 500 is almost 10%, so this year's performance so far is nearly double what investors can expect to earn in an average year, when investing consistently.

It's not unusual for the S&P 500 to surge in excess of 20% in a calendar year, though. In fact, it's happened 23 times in the past 90 years, according to data analyzed by Grow. That growth often follows a less stellar year for the stock market, and, as you may recall, the S&P 500 narrowly escaped entering a bear market — defined as a decline of at least 20% from a recent high, based on closing levels — when it fell more than 19% between September and December 2018.

Given that late-year slump, the year-over-year returns for the market are somewhat less impressive. The S&P 500 is up about 7% since this time last July.

What's more, a strong first half could be followed by below-average performance the remainder of the year, if history is any guide. When the S&P 500 has risen more than 15% through June, the second half has seen average returns in the last six months of 3.1% on average, according to data compiled by LPL Financial.

So while it's still too soon to tell, 2019 could end up to be a more typical year, which still would give you a strong return on your stock investments.

Why it's important to think long term

As the above chart illustrates, the stock market's returns in any given year can fluctuate. In the past 20 years, for example, the S&P 500 has seen annual returns ranging from up nearly 30% to down more than 38%.

These types of short-term changes are the reason why experts recommend you think about, and invest for, the future. That means you'll have time to ride out any periods when the market gets bumpy — and benefit from the market's proven, long-term track record.

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