All investors need to know the answer to two questions in order to be a successful investor. Those questions are the following:
What have the long-term stock market returns been?
Are those stock market returns achieved by either picking individual companies or timing when to enter and exit the stock markets before market downturns?
There are many different stock markets around the world. For this post, we will only focus on the United States stock market, and specifically the Standard & Poor’s S&P 500 index (S&P 500). The historic records for the US stock market go back to 1926. The index is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market.
During that long time period until the end of 2015, the S&P 500 index total return (which includes dividends) has grown an average of approximately 10% per annum. To put that into perspective, one dollar invested in this index in 1926 would have grown to $5,386 by the end of 2015. Staggering!
So what did investors need to do to capture these strong positive for returns derived from the S&P 500 index?
Well they just needed to stay invested during the S&P 500 index declines of nearly 15% in 1973 followed by a 26.5% decline in 1974. In addition, investors needed to stay invested during the yearly declines in 2000 (-9.1%), 2001 (-11.9%) and 2002 (-22.1%), and again with the staggering loss in 2008 of 37% in the same index.
The key point is the answer to the second question at the beginning of the post. Investors did not need to know which of the companies in the S&P 500 index would perform best or avoid the companies that would do poorly. Investors just needed to own the entire index.
Investors or their advisors also did not need to know when to invest money in the index and when to remove money from the index in order to achieve these strong positive returns. Investors just needed to have owned the index throughout the time period.
This is without even discussing the incredibly poor track record of people being able to market time or trying to determine if this is a good day, week, or month to invest in the market.
This discussion only dealt with the 500 largest publicly traded companies in the United States. This same perspective occurs in all publicly traded stock markets. If you look at the large company index for Europe and Asia (known as the MSCI EAFE Index), the total return for this index since 1970 is 8.8%. This index has only been calculated since that time period. The MSCI EAFE Index is designed to measure the equity market performance of developed markets outside of the U.S. & Canada.
If you look at how small publicly traded companies have performed during these time periods, you will see that they have performed better than their large company counterparts for both the US markets, as well as the international stock markets.
The US small company total return index – which has data going back to 1928 – shows that the total return for these smaller companies averaged 12.0% per annum through 2015. This index consists of the smallest companies by market value of the 3000+ companies that trade on the publicly traded exchange markets. The international small company index has data going back to 1970 and it shows the total return from 1970 through 2015 was 14.5% per annum.
Again, investors only needed to continue to own this index to get those strong positive returns.
Difficult to do alone?
Hire a behavioral advisor to help you through the tough times so you can achieve the long-term stock market returns.
Hopefully, this post highlights that the vast majority of the daily and monthly commentary that investors are exposed to regarding which companies, which sectors to own and when to buy or sell individual stocks is not relevant in order for investors to receive strong returns.
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