Expecting Average Returns Doesn't Mean You Should Expect Average Years

Stocks rallied last week with the S&P 500 climbing 2.7% to close at 5,099.96. It was the best one-week gain since November. The index is now up 6.9% year to date and up 42.6% from its October 12, 2022 closing low of 3,577.03. For more on market volatility, read: Even strong stock market years can get very stressful

History teaches us that the stock market generates average annual returns of 8-10%. And so it’s perfectly natural for investors to form expectations that prices will mostly trend steadily higher throughout any given year.

But it can also be unsettling to watch the market track significantly below or above the path that gets you to that average return — kind of like what you see below in this chart from Ritholtz Wealth Management’s Ben Carlson, which shows the average one-year price path of the S&P 500 since 1950.

The average annual return in the stock market is about 9%. (Source: Ben Carlson)

As Carlson astutely notes, “if you look at the individual years that make up this average, the range of results are all over the place.“

He offered a second chart plotting all the one-year paths of the S&P since 1950.

But most years don’t follow the average path. (Source: Ben Carlson)

“There is no such thing as an ‘average’ year in the stock market,” Carlson wrote.

All of this echoes TKer Stock Market Truth No. 3: Don’t ever expect average. (In fact, when I published 10 Truths About The Stock Market in October 2021, I used one of Carlson’s charts to illustrate the point. Subscribe to his newsletter!)

Zooming Out

It’s fair to expect average annual returns over the lifetime of your investment in the stock market.

But don’t expect average returns for each individual year. That would set you up to be overly disappointed in below-average years, and perhaps overly worried about froth in above-average years.

Best to be mindful of the fact that average returns are only realized after combining multiple years of performance, which will include some below-average years and above-average years.

A version of this post was originally published on Tker.co.