Not every investor has the same investment timeline. Some stock market traders move in and out of stocks in a few seconds. Others turn their investment portfolios over several times a year. Still others, like billionaire investor Warren Buffet, keep equities in their portfolios for many years. The history of the market suggests short-term investors may be subject to considerable volatility, but very long-term investors benefit from the market's long history of upward-rising values and long-term stability.
Long-Term Average Return
The Standard & Poor’s 500 index is a broadly diversified index of 500 large U.S. corporations. Investors often use the S&P 500 index as a gauge of the overall stock market. Since 1950, as Simple Stock Investing notes, the S&P 500 has gained an average of 11 percent annually. These returns are compounded. One dollar invested in 1950 returned $500 by 2010.
Stock Market Cycles
Although an 11 percent return is excellent, this is an average over a very long period of time. Over shorter periods of time, an investor might do considerably better or considerably worse. For the 10-year period beginning in 1990, data collected by Robert Shiller and Standard and Poor's, cited in Simple Stock Investing, indicate the S&P 500 returned over 18 percent annually. For the 10-year period beginning in 2000, however, the S&P 500 returned -1 percent. The stock market moves upward and downward cyclically, and these cycles are several years long.
Long Bear Markets
There is widespread disagreement about exactly how long the average market periods of expansion or contraction last, but widespread agreement about the general trend. On average, a bull market expansion lasts between 35 and 54 months. The average bear market period of contraction lasts about 15 to 20 months. A few bull and bear markets, however, last considerably longer. If you begin investing at what turns out to be the beginning of a long bear market, your returns, even after 10 years, may be far less than the long-term 11 percent average. As in the decade beginning in 2000, your returns may be negative.
Long-Term Stability Versus Short-Term Volatility
If you're a relatively young investor, you have a long run of investing ahead of you -- perhaps as much as 30 or 40 years. This is fortunate, because in the very long run, the stock market is fundamentally stable. As Standard and Poor's and Shiller's statistic indicate, since 1950, every 30-year period in the S&P 500 yielded positive gains. While no one can predict the future of the stock market, the market's history of long-term stability and gains suggests that if you regularly invest and stay invested in the stock market over the very long term, you are likely to do well.
- SimpleStockInvesting: S&P 500: Total and Inflation-Adjusted Historical Returns
- AssymetryObservations: The Real Length of the Average Bull Market
- The Market Oracle: Stocks Secular Bull and Bear Markets
- U.S. Securities and Exchange Commission: Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions
Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.