The Messy Reality of Long Term Averages

Today was a rough day for stocks. In fact, it’s been a rough year. 

When in doubt, zoom out. 

Below are the last 95 years of S&P 500 returns. 

Since 1926, the US stock market has rewarded investors with an average annual return of about 10%. 

However, it’s important to remember that returns in any given year may be great, poor, or anywhere in between. Consider last year (up 26%) and this year thus far (down 12.6% as of 4/26/22) as a prime example of this. 

You see, averages are messy. They lead you to believe they’re an indicator of what’s to come in any given year, but, in reality, annual returns came within two percentage points (2%) of the market’s long-term average of 10% in just 7 of the past 96 years. That’s a pretty low likelihood of a single year landing close to the average. 

Yearly returns have ranged as high as up 54% and as low as down 43%. • 

Since 1926, annual returns have been positive 71 times and negative 25 times.

Those positive years occurred amidst a host of negative news and those negative saw their fair share of positive news. It’s impossible to know which cycles will take hold and which the market will shrug off as immaterial. 

Earlier today I spoke with an analyst who claimed “the good returns of 2020 and 2021 hijacked some of the future returns of 2022"… This is partially true — all good years help subsidize poor ones and the poor years help lay the foundation for good years. What matters is how we string together a lifetime of investing in pursuit of what you’re trying to accomplish. 

Still, it makes investing tough in the day-to-day cycle of bad news. 

Generally speaking, I think investors in this environment should remember one key principle: 

Prices today reflect expectations. 

As an example of this, look no further than the bond market, which is on track for its worst year EVER. This isn’t surprising because bond prices fall when interest rates rise, and we’ve all heard about how the Federal Reserve has to raise rates to stave off inflation. 

Q. So how much has the Fed raised rates to result in the worst year ever for bonds? 
A. Just 0.25%

Yes, that’s it. The Fed has only officially raised rates by a quarter of a percent…. But bonds are already reflecting many more rate hikes. The prices are telling a story about the future. 

Remember this when you see stocks fall too. Everything that’s happened is a reflection of things we know, things we think may happen, and the uncertainty we all are faced with. 

So if you consider making drastic moves based on a vision of what you think the future holds, ask yourself do others feel this way too and is there a chance it’s already reflected in the price today?

I have specific thoughts about what to do from an investment standpoint, but those aren’t prudent to offer within a blog format (which is why I offered this link to clients earlier today). 

I have been drawing up some additional thoughts about stocks, bonds, real estate, and inflation. Stay tuned and feel free to reach out if you have any questions or concerns. 

Be well, 

Adam Harding, CFP & Owner at Harding Wealth
www.hardingwealth.com