Let's start with a question for you. What is the average return of the S&P 500 over it's 90 year life? If you were to ask most investors they would say that it's 7% which is not too far off. The actual average lifetime return is 9.8%. So why do people say 7%? Well, 9.8% is a raw return and many people factor in an inflation expectation of 2.8% which brings them to a 7% average return. While you might disagree with the inflation assumption (I do to) that is not the topic of today.
We wondered, if 7% was the average return an investor should expect from simply buying and holding the S&P 500, or 9.8% if you want to use the raw number, then how many times would you actually see a return in the 5-10% range? Turns out you will be disappointed 94% of the time.
The S&P 500 returned gains of 5-10% in a given year only 6.7% of the time...Over it's entire life! So, if you were a novice investor and hear everyone say to expect a 7% average return, you would think they were wrong. So how do we get to 7% then? Well, 50.6% of the time you will see a return that is greater than 10%. In fact, 27% of the time the S&P 500 actually returned greater than 20%.
Now, on the downside, 33.7% of the time you will break even or lose for the year. The problem with this, and this is where you should prepare yourself, is that the S&P 500 very rarely loses between 0% and -10%. About 12% of the time do you see a small drop for the year. A whopping 21.3% of the time you will see losses amount to more than 10%.
So what is the point of all this? If you are expecting to see an average return of 7% after inflation, or 9.8% raw returns then you will get there, but prepare yourself for many years where you see nothing close to "the average."