A Brief Look at a Century of Returns
Reliable records for U.S. stock market returns began in 1926. 1926 was a good year for the S&P 500, with a return of 11.6%. 1927 was even better at 37.5%. The 1928 return was 43.6%. You’ve heard that phrase “the roaring 20s,” and certainly the stock market was roaring. No doubt lots of would-be investor bystanders jumped into the market for the first time after returns like those three years. The feeling of “everybody’s getting rich and I’m getting left behind” was prevalent. Suppose your great-granddad invested $100 in the S&P 500 at the beginning of 1926. That $100 had turned into $200 three short years later!
Of course, you’re also familiar with the “Great Depression”. We tend to think of it as starting in1929. That year the market dropped 8.4%. That may seem rather mild given the volatility of today’s markets. But it came on the heels of three strong return years, so no doubt a shock to a lot of investors. “I thought this market would go on forever”. That “recency bias” attitude still exists today. Despite that 1929 down year, granddad’s hundred bucks was still worth $183. Not bad! But it was about to get bad. Really bad!
In 1930, the stock market lost 25%, shaking investor confidence to the core. That was followed by 1931, where the loss was over 43%. By 1932, losses slowed to 8% for the year. If you’re keeping score, granddad’s $200 at the end of 1928 is now down to $82 four short years later! Your great grandma is mad. She told him not to invest in that stock market, thinking it was a scam from the get-go! But granddad’s stubborn and he ignores his wife’s complaints. As the decade of the 30s closes out, his original $100 is now back to $209!
That 14-year period from1926 through 1939 is more volatile than most periods in the market. But it’s a great illustration of just how punishing the stock market can be. You’ve got to be able to stomach the downturns that inevitably come along. If you stay the course, you’re generally rewarded for doing so. The highest return during that period was 48% and the lowest was minus 43%! Ouch! Some stomach churning periods to say the least! It’s enough to make you want to put your money under the mattress, or at least in Treasury bills.
Grandma worried over those fluctuations. Her choice of investing would have been U.S. Treasury bills. T bills certainly would have avoided those severe twists and turns. Over that same 14-year period, Grandma would never have experienced a negative return, though she would have had a couple of years of zero returns. The highest return over that period for T bills was 4.7%. But at the end of that 14-year period, her $100 is worth only $122, compared to Grandpa’s $209! You might conclude that giving up all those ups and downs was worth it, even though Grandma earned $87 less. But, as Paul Harvey would say, let’s look at the rest of the story.
Assume their descendants left the $100 invested through the years. Grandma’s $100 invested at the beginning of 1926 in T bills grew to $2500, a 25-fold increase. And her family never experienced a negative year! Meanwhile, Grandpa’s investment in the stock market lost money one year out of every four! That’s 25 years of losses! But it’s also 75 years of gains! Did the gains outweigh the losses? You bet they did! Left untouched for 100 years, Grandpa’s $100 grew to $1,706,000!
This is a brief look at a long period of financial history. You see how punishing the stock market can be, as well as how rewarding it is over time. You don’t have to be all Grandpa or all Grandma. Most of us need a mix of stocks and T bills, or other fixed income. The stocks build wealth and the bonds soften the blows of the twists and turns of the market. Select the level of risk you can handle and stick to it through the ups and downs. It’s your best chance for a successful investment experience over time!