Range of Stock Market Returns - Short Term vs Longer Term

Jan 08, 2019 | Nick Hamilton


With the ongoing market volatility, I wanted to share some perspective on stock returns. Please see the attached chart from JP Morgan.

Short term, the behavior of stocks can sometimes be viewed as erratic, with a wide range of return outcomes over shorter periods of time (1 year or less). Longer term, this behavior is muted and stacked increasingly in the best interests of investors (5 years or more). This is largely attributable to the cycles that must be allowed to play out for businesses to deliver results to investors. Investing in companies, therefore, requires patience and a time horizon of several years to ensure success. This chart summarizes 68 years of return data for US markets comparing Stocks and Bonds and a Balanced portfolio of roughly 50% of each asset class.

Two key take away points from this information:

1.  Negative returns within year one investing in stocks is not statistically uncommon. Good returns typically require a view of 5 years or more which is more in line with the proper definition of investing versus speculating for short term gain; and

2.  When stocks are weaker over the short term they should be accumulated, not avoided- although this is contrary to human emotion.

Lastly, while stock returns are roughly twice those of bonds since 1950, the environment of rising interest rates will make it much more difficult for bonds to provide the same level of returns as they have historically.

While we often get our information from various sources of news publications, the emphasis is usually always on the alarming nature of the change. In my opinion it’s better to view the change in context with a longer term view and to understand the patience required as an investor to achieve the desired results from your investments.