I got a little carried away with the data that follows, but there are just too many lessons you can learn from the market’s history.What I did was calculated the 1, 5, 10, 20 and 40 year returns starting in 1950 for the S&P 500, including dividends.
Look over this chart few a few minutes, then scroll to the bottom to see what you should take out of it.
Lesson # 1 – The 2000′s were Crazy, But so were the 70′s
If you compare the returns between the 00′s and the 70′s, it’s fairly similar.
What Does That Mean?: The 00′s were a pretty volatile time to invest, but it’s not like the market is new to volatility. The volatility in returns in the 1970′s, were very similar to what happened recently.
So What’s The Lesson?: In our lifetime, the market will perform similar to what happened in 2008. This shouldn’t come as a surprise. To prepare develop an emergency fund, understand your risk tolerance, and fine tune your asset allocation.
Lesson # 2 – Average Isn’t a Regular Occurrence
Only 5 times since 1950 has the stock market returned between 8% and 12%.
What Does That Mean?: Very rarely does the stock market perform around it’s average. You’re more likely to see the market go up 25%, down 10%, and back up 25%.
So What’s The Lesson?: Enjoy the roller coaster ride of investing. There are going to be ups and there are going to be downs. Know this going in and don’t overreact to short-term market fluctuations.
Lesson # 3 – Risk Decreases With Time
The standard deviation of returns, decreases significantly, as your time horizon increases.
What Does That Mean?: The longer you invest, the less volatile your investment.
So What’s The Lesson?: Even if you a super conservative, you should still be investing in the stock market. It’s not very risky, if you have a long time horizon.
Lesson # 4 – Ugly to Great
If you look at the years, when the market performed its worse, it usually means good things are to come.
For example, in 2008 the market returned -37.22%. In 2009, the market returned 27.11%.
In 1974, the market returned -26.95%. In 1975, the market returned 38.46%.
What Does That Mean?: A down year, is soon followed by a very prosperous one.
So What’s The Lesson? Keep on investing, when the market is going down. You’re buying stocks on sale because prices are soon to go up. If you’re afraid that you’re investing when the market is at an all time high, dollar cost average into the market.
There are more hidden gems inside this chart. What am I missing?