As a financial advisor, one of the most common concerns I hear from clients is the fear of market volatility and potential losses. It’s a valid concern, especially when headlines often highlight the latest market downturns. However, one of the most powerful concepts in investing is the importance of the time horizon. Historical S&P 500 return data from 1926 to 2023 illustrates a compelling case for the benefits of staying invested over the long term. In this blog, we’ll delve into the numbers and understand why the time horizon is crucial for increasing the probability of positive returns.
S&P 500 Return Data
The S&P 500, a benchmark for U.S. equity markets, has experienced its share of ups and downs. The daily movements of the market can seem as random as guessing whether the ball will land on black or red on a roulette table. However, when we look at the historical data over different time periods, a clear pattern emerges: the longer you stay invested, the higher the probability of positive returns. Below are some key takeaways:
Table. S&P 500 Nominal Rolling Returns 1926 – 2023[1] (Dividends Reinvested)
- 1-Year Returns: The range of returns in any single year is quite broad, with a maximum return of 139.8% and a minimum return of -62.3%. The average annual return over this period is 12.2%, with 74.7% of years ending in positive territory and 25.3% in negative.
- 5-Year Returns: When extending the investment period to five years, the maximum return narrows to 33.7% per year, and the minimum return improves to -17.3%. The average annual return is 10.8%, with an 88.5% probability of positive returns.
- 10-Year Returns: Over ten years, the data becomes even more favorable. The worst 10-year period saw a -4.0% annual return, but the probability of experiencing a positive return rises to 95.7%. The average return remains strong at 10.5%.
- 15-Year Returns: A 15-year investment period virtually eliminates the risk of negative returns, with the worst outcome being a slight -0.4% annual return. The probability of positive returns climbs to 99.9%, and the average annual return is 10.2%.
- 20-Year and Beyond: For periods of 20 years or more, the data shows a 100% probability of positive returns. The worst 20-year period yielded a 2.0% annual return, and this increases slightly for 25-year and 30-year periods, with minimum returns of 3.8% and 3.6%, respectively. The average annual returns stabilize at around 10.1%.
Power of Patience
The data tells us a simple yet profound message: patience pays off in investing. The volatility and potential for loss in the short term can be daunting, but historical data supports the idea that time in the market is a more effective strategy than trying to time the market. Burt White, CEO of Carson Group, recently encapsulated this sentiment in a tweet: “Markets are built to recover and gain new highs. We, as investors, are built to not trust it.”[2] Since 1926, we have experienced a world war, regional conflicts, the depression, financial crises, recessions, elections, and other significant events, yet American businesses and our economic system have consistently navigated through these challenges to grow, increase sales, and generate positive shareholder value. Here’s why trusting in the resilience of markets and your time horizon is so important.
- Reduction of Risk: As the investment horizon lengthens, the likelihood of negative returns diminishes. Over a 20-year period, the probability of experiencing a loss is effectively zero based on historical data.
- Compounding Returns: The longer your money remains invested, the more it benefits from the power of compounding. This means your returns generate their own returns, leading to exponential growth.
- Market Recoveries: Markets are cyclical and have historically recovered from downturns and other exogenous events. By staying invested through these cycles, you capture the full recovery and subsequent growth periods.
Conclusion
The journey of investing can be fraught with uncertainty, especially in the short term. However, the historical data clearly shows that a long-term perspective greatly enhances the likelihood of positive returns. By trusting in the time horizon and maintaining a disciplined approach, investors can navigate market volatility and work towards achieving their financial goals. Time is one of the most powerful allies in an investment strategy. Markets are indeed built to recover and gain new highs, and as investors, we must cultivate the patience and trust to let them do just that.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
[1] Robert Shiller, "Online Data - Robert Shiller," available at http://www.econ.yale.edu/~shiller/data.htm (accessed May 28, 2024).
[2] Burt White, Twitter post, May 17, 2024, https://x.com/_BurtWhite/status/1791609318376165467