Two the Point — A Stock Market History Lesson

Last week we read an article by investor Ben Carlson titled, “Is It Realistic to Have 100% of Your Portfolio in Stocks?” The answer to that question is always frustrating…it depends.  We’ll touch on that later. Given the volatility of the last 12 months, we thought taking a step back to review the history of stock market returns would be useful.  Recognizing that predicting the near-term market direction is hard, this week we rely on historical probabilities to help inform our long-term thinking about stock market risk.

The table below provides returns for the S&P 500 since 1928.  Here, we summarize some of the most interesting observations from this annual return history:

  • You have been more likely to earn a return of 20% or more than experience a loss of any kind.
  • The S&P 500 has ended the year with gains of more than 20% 34 times. That’s more than one-third of the time.
  • There have only been 26 times when a year ended in a loss or a little more than 25% of the time.

The bottom line is that with a sufficient time horizon, the history of stock market returns should make us all feel very optimistic about our ability to compound wealth.  The most difficult time to be 100% invested in stocks is if you must sell during a down market. The average bear market only lasts about a year from peak to trough, but the average time to break even is closer to three years.  For this reason, those that need their portfolios for liquidity rely on the steadiness of bonds to avoid selling their stocks when they are down.  Calibrating liquidity needs with the powerful long-term return history of the stock market is the foundation of building an appropriate portfolio.

Source: Data – NYU. Ben Carlson, “Is It Realistic to Have 100% of Your Portfolio in Stocks?”