What can we expect from the stock market ?

January 17, 2018

 

"The stock market (equity market ) has tended to produce statistically positive returns over a long time frame and has therefore been the most reliable source of long term returns amongst many asset classes."

 

Why would we care ?

 

Because, as a working citizen ( of the U.S. / North American continent ), you are responsible for saving and growing money for your retirement.

 

These accumulated savings can be placed in different locations in order to produce some expected return and these savings will be at the mercy of inflation. Inflation is the rising prices / cost of goods and services that we, as consumers, use. In modern life, we can't easily get around the use of these goods and services. Has the cost of going to the dentist, paying for college, renting an apartment, fixing a car, having a wedding, buying an iphone gone up ? Of course ! And these price rises probably won't stop over our lifetimes ( although it would be nice if they did ! ). 

 

Do you save your money in a bank account ? If you do, you're probably earning 2% a year on your savings. What is the average annual cost of inflation ? Around 2.5% - 3%.  Savings earning 2% interest a year minus 3% ... hey wait a minute ... that's a minus 1% return on your savings !  

 

Therefore, in order to make more on the savings in your bank account than that of which inflation is taking away, you may need to look further afield.

    

 

 

Historical Context of Stock Market Returns

 

Chart 1 shows the + 7.7% exponential growth of the the stock market, as measured by the  S&P500 index, over a 100 year period.

 

 

Chart 1

 

 

Since 1954, the U.S. equity market has risen more than it has fallen ( has had more positive years of return vs. negative ) putting odds of positive return outcome in favor of the average passive investor.

 

 

Chart 2

 

 

 

Chart 3

 

 

 

Chart 4

 

 

 

 

 

If we had placed our savings into the the stock market, we can see that, historically since 1954 ( chart 2 ), the S&P 500 produced an average rate of

+17 % per year, 72% of the time ( chart 2 above ). Yet, the stock market has produced an annual average rate of -13.1 % when it has gone down ( chart 3 ). If we average all of the positive years and negative years, the S&P 500 has produced an annual return of 8.6 % ( and that includes taking out that nasty inflation effect ! ). 

A bank account produces SOME % interest rate ( say 2% presently / -1% with the "inflation" effect ) 100% of the time. An +8.6 % return looks a lot better than a -1 % return !    

 

               

 

 

 

 

 

 

 

 

 

 

 

 

  

 

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