Google “average annual return for the S&P 500,” and you’ll see figures around 10 or 11 percent. Technically, that’s right, based on the historical average of the index going back to 1927.
So I can count on earning 10 percent each year?
Sadly, probably not.
“Markets are volatile, and very rarely will you receive the exact long-term annual return in any specific year,” says Zack Shepard, vice president of Matson Money in Scottsdale, Ariz. “If you look at the distribution of returns for the entire U.S. market since 1926, they have ranged from 60 percent to -40 percent.” And that’s a pretty broad range.
Note that Shepard is talking about the entire U.S. stock market—not just the handful of companies we may have in our portfolios. To truly have a stock portfolio that performs like the S&P 500, for instance, we’d have to own stock in all of the 500 companies in that index. Most of us aren’t going to buy shares in all those companies—unless we opt for diversified investments in index funds, which are designed to mimic that index’s returns. (More on the benefits of doing that later.)
Anything I can do to boost my returns?
The short answer: Stick with it. “Staying the course is the most important thing you can do to take advantage of the historic returns the market has provided,” Shephard says.
Take this counterexample: According to Dalbar’s 2016 Quantitative Analysis of Investor Behavior, over the last 30 years, the stock market produced an annual rate of return of 10.35 percent—yet the average stock fund investor earned just 3.66 percent. What gives?
For starters, our emotions sabotage our success all too often. “Because of market volatility, investors inherently tend to make drastic portfolio changes and do the opposite of what they should: They buy high and sell low,” Shepard says.
Fortunately, we’re not doomed to bad decision-making: We can fight the tendency by staying laser-focused on our long-term goals—then riding out any ups and downs until we hit our goals.
Kim Forrest, vice president and senior analyst at Fort Pitt Capital Group in Pittsburgh, also points to high fees as another reason our returns may not mirror the entire market’s.
A smart solution? Rather than shelling out for individual shares in many different companies—a risky move for most investors, anyway—consider purchasing lower-cost funds such as ETFs, or exchange-traded funds, that often mirror indexes (like the S&P 500). These typically require very low management fees and allow us to own a diverse group of investments, which is key to protecting ourselves from the market’s highs and lows anyway.
January 18, 2017