It’s natural to approach investing with caution. The volatility of stocks can be intimidating, especially considering the potential for financial loss. Despite the common wisdom that investing leads to wealth, it’s hard to forget the crashes that have occurred in the past. The recent fluctuations in February have only heightened these concerns.
However, a closer examination of historical market data can offer reassurance. Delving into the annual returns of the S&P 500 since 1928, just before the Great Depression, provides a fascinating perspective on market trends spanning nearly a century. Analyzing these returns and performing some calculations reveals surprising trends that may alleviate your apprehensions about investing.
Here are some reassuring insights gleaned from nearly 90 years of S&P 500 performance:
- Winning streaks tend to outweigh losing streaks: Over the years, the S&P 500 has shown remarkable resilience. We’ve witnessed extended periods of positive returns, such as the nine-year streak from 1991 to 1999, an eight-year run in the 1980s, and a six-year surge post-World War II. In contrast, the longest losing streak spans only four years, occurring during the Great Depression. There have been only two other instances of a three-year decline, with just one since 1941.
- Highs often surpass lows: While downturns in the stock market can be memorable, it’s essential to recognize that the market’s upward swings can be equally dramatic. For instance, while the S&P 500 plummeted nearly 37 percent in 2008 and a staggering 44 percent in 1931, these declines are balanced by significant gains. The market surged by 53 percent in 1954, 43 percent shortly after, and experienced a 37 percent return in 1975, alongside a 32 percent leap in 2013. Each downturn is often followed by a subsequent increase that surpasses the previous decline.
- Bad years typically pave the way for good ones: Throughout its history, the S&P 500 has encountered 24 years of negative returns since 1928. Interestingly, in 16 of these cases, the index rebounded with positive returns the following year. This pattern suggests that, more often than not, the market tends to bounce back after a downturn, with subsequent increases often exceeding the previous year’s decline.
- Double-digit returns prevail over single-digit ones: Distinguishing between a good return and an exceptional one often boils down to surpassing the 10 percent mark annually. Since 1928, this milestone has been achieved a remarkable 51 times. Conversely, the S&P 500 has experienced only 24 instances of negative returns during the same period, with just 15 occurrences of gains below 10 percent. In essence, the stock market exhibits a propensity not only to rise but to do so significantly.
- Nearly every 10-year period yields positive returns: The recommendation to evaluate a 10-year return on any investment holds weight for a reason—it typically reflects an overall positive return, even amidst occasional downturns. Across all 10-year intervals since 1928, identifying a negative total return on the S&P 500 proves challenging. An examination of any decade since then reveals a positive return in 88 percent of cases. This statistic underscores the importance of patience in the realm of investing.
- Recovery typically occurs within five years: While significant stock market declines can inflict pain, historical data suggests that full recovery seldom takes an extended period. Following a loss of 20 percent, for instance, regaining lost ground may seem daunting, requiring a subsequent 25 percent gain. However, the stock market has historically facilitated relatively swift rebounds.
Those who experienced losses during the 2008 crash likely saw their investments recover and surpass previous levels by 2012. Similarly, losses incurred between 2000 and 2002 were likely recouped by 2006. Continued investment during downturns could have expedited the return to positive territory even further.
