The Standard & Poor’s 500, more commonly known as the S&P 500, is an index of 500 large United States companies. It is often used as a barometer of the health of the U.S. stock market and economy. With an immense amount of historical data, we can get a better understanding of what it is like to invest in the stock market over the long-term.
As an investor, one has the ability to purchase an index fund that tracks the S&P 500 in order to receive similar returns, net of fees. Index fund fees have decreased dramatically over the years and are now typically in the .03-.10% range. This is a huge cost savings when compared to the actively managed mutual funds that can charge upwards of 1-2% per year.
Over the past 90 years (1928-2017), the S&P 500 has an average annual rate of return of 11.53%. It is important to remember that this is an average rate of return and should not be expected every year. In fact, the annual returns range anywhere from -43.84% (1931) to 52.56% (1954). More recent years show a similar range of returns. In 2008, the S&P 500 had an annual return of -36.55%, while in 2013 it had a positive return of 32.15%.
To get a better view of the S&P 500 annual returns since 1928, I put together a scatterplot for you to see.
In this chart, you can visualize the mostly-positive nature of the S&P 500 index over the years. When you hear or read about the fear in the market, it is best to understand what has happened historically. Individual stocks are much more susceptible to fluctuations in price, but the market as a whole has shown a resilience to poor economies over time.
In fact, as you might expect based on looking at the chart, the S&P 500 has had a positive return in 66 of the past 90 years (73%). This leaves the negative years to only 24 of the past 90 years (27%).
Although it would be more comforting as an investor to have positive returns every year, history has proven to be on the side of the investors that stay in the market for the long-term.
It is important to understand stock market returns over the very long-term, but it is equally important to see the fluctuating returns over shorter amounts of time. Looking at returns decade by decade, we see the following average annual rates of return:
Hopefully this gives you a good idea of how important it is to stay invested for the long-term. One-year returns of the S&P 500 index can be extremely volatile, while 10+ year time-frames show a much different (and more positive) picture.