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Last year’s return of 11.96 percent of the S&P 500 was slightly below the median of 13.69 percent, dating back to 1926. The return did mark eight consecutive years of positive returns earned since the financial crisis of 2008-2009. The histogram below reveals several points that one should consider (produced by American Investment Services Inc.).
First, the randomness of returns is evident by noting no particular momentum in annual returns. Second, positive returns have been dominant; there have been 67 years of market gains (depicted in green) versus 24 years with losses. Third, the magnitude of the market’s gains in positive years on average have exceeded the magnitude of losses during the negative years. The average (arithmetic) return during the positive years was about 21.24 percent versus the annual average loss of 13.61 percent during the negative years.
Over the 91-year period, the average compound annual return was 10.04 percent. However, over shorter time periods (10 years or in some cases longer) the return was breakeven or negative. For example, from Jan. 1, 1999, through Dec. 31, 2009, an investor’s average annual return would have been -1.070 percent. And for the period Jan. 1, 1930, through Dec. 31, 1945, the average annual return was -1.406 percent.
The histogram does not take into account the impact of price inflation. If you adjust the 10.04 percent return for the loss of purchasing power (as measure by CPI), the annualized return falls to 6.94 percent. To put these returns in perspective, an investment of $1,000 made at the beginning of 1926 would have grown to $6.03 million by the end of 2016 in nominal dollars; however, after accounting for price inflation, the ending value would have been only $447,226.
Despite the almost impossibility of predicting calendar year returns, the U.S. stock market is likely to continue to be an alternative for investors looking for long-term real growth.
Craig C. Le Bouef, MBA, CPA/PFS, CFP, Shareholder of Going, Sebastien, Fisher, & Le Bouef, LLP, Certified Public Accountants, Registered Investment Advisors, and Consultants, 2811 South Union, Opelousas. Website: www.goingcpa.com E-mail: firstname.lastname@example.org.