I’m sure you have heard somewhere that the U.S. stock market has averaged about 10% per year over the long term. However, if you are looking in the rear-view mirror at the last decade from 1/1/2000 to 12/31/2009, the S&P 500 Index returned an average of just 1.21% per year including dividends. So it might seem logical to think that we are in for a period of lower returns and a “new normal.” It’s true that there is plenty of uncertainty today, so who can blame you? Unemployment and budget deficits are high while economic growth and consumer confidence are low.
As a retirement planner, I focus my advice on helping people achieve their long-term financial goals and building wealth. No one wants their money to last only a few years, so why do so many people take a short-term view of the stock market? It’s called anchoring – the natural human tendency to base our expectations of future results on our most recent experience.
What if we extended the time period just 10 more years to look at the last 2 decades? Did you know that the stock market produced positive returns in 15 of the last 20 years? 1990, 2000-2002 and 2008 were the only five down years for the S&P 500 Index. Or, looked at another way, the market was going up 75% of the time!
Now what if I told you that the S&P 500 has averaged 10.1% per year over the last 20 years? My guess is you wouldn’t believe me because the last 10 years were so far below the average (1.21%). In fact, in the 10 year period from 1/1/1990 to 12/31/1999, the S&P 500 Index averaged 18.99% per year! So if you average that 18.99% with the 1.21% for the last 10 years, the S&P has averaged 10.1% over the last 20 years. Amazing! Twenty years may seem like a long time, but the average couple age 62 has a joint life expectancy of approximately age 90, or 28 years!