Expected Returns [Post 38]

The S&P 500 is a widely recognized stock market index that reflects the performance of the 500 largest publicly traded companies in the U.S., acting as a key benchmark for the broad U.S. market. From 1926 to 2023, the average annual return of the S&P 500 was 12.2%. Based on this figure, one might expect the most common yearly returns to be around the 8-14% mark, right?

Not quite. Viewing the following graphic produced by Dimensional may tell a different story.

Surprisingly, the S&P 500 has never posted a yearly return between 8-10% using this calculation. Instead, the index tends to deliver returns at the extremes—often swinging from negative to notably positive. For instance, it might drop by -10% in one year and soar 34% the next (averaging around 12% for those two years).

The takeaway? Achieving average returns requires time and patience. In the short term, market returns are likely to land on the extreme ends of the spectrum, making predictions challenging. That’s why it’s essential to stay the course for the long haul with a diversified strategy to capture more representative results.