Stocks appear to have some momentum as we enter the final quarter of the year. The large-cap U.S. stocks of the S&P 500 ended September at an all-time high, notching a new record for the 43rd time in 2024. The index is up 22% so far this year, far outpacing the long-term average annual return. As it turns out, such a large deviation from the average is actually pretty normal for the stock market.

The chart below illustrates the annual return for the S&P 500 Index for each of the 98 years going back to 1926. A few observations:

• The range of potential outcomes is very wide, stretching from above +50% to below -40%
• The normal pattern seems to be several years of well above average performance, followed by a small to moderate loss, with a larger loss occurring every 10-15 years or so.
• Although +10% is the long-term average return, the market very rarely ends a year anywhere near that figure.

Source: Dimensional Fund Advisors

The last bullet above is very surprising. Of the 98 years represented in the chart, only six of them were within +/- 1% of the average! This has important implications for investors. If the market steadily churned out a 10% return each year, investing would be relatively easy. There would be far less noise constantly toying with investor emotions.

It takes considerable willpower to stay diversified when the market (or a segment within) is ripping. It’s arguably even harder to stay invested when it feels like the bottom is falling out. Fear and greed are powerful motivators that can lead to decisions that might cost you in the long run. To combat this, remember that large swings, both to the high and low side of the return spectrum, are a normal and healthy feature of the stock market.

Ultimately, a 10% return will double an investor’s assets roughly every seven years. That represents substantial wealth-creating power, particularly when compared to the long-term historical return on more stable asset classes, such as bonds (+5.1%) or cash (3.3%)¹. By staying disciplined through the inevitable spikes and drops in the market, investors put themselves in the best possible position for success.

1. Bonds represented by the IA SBBI Long-Term Government Bond Index. Cash represented by the IA SBBI 30-Day T-Bill Index. Historical returns reflect the period between 1926-2023.

Source: MarketWatch

IMPORTANT DISCLOSURE INFORMATION