“The stock market, on average, returns 8% per year”. You’ve heard that statement probably a thousand times before. If you’ve been reading this blog, you’ve heard it here as well. But there is a lot of data and questions buried by that 8% figure. Should I expect that return every year? What is the worst I can expect? Does investing for longer periods of time increase my changes of earning 8% on my investments? I want to do some statistical analysis to show you the relationship between time, reduced risk, and reasonable expectations of your investment returns.
In the below graph, I show historically how the stock market has performed over a 1-30 year period going back to January, 1950 (the earliest data I had available). By that I mean, from January 1, 1950 to January 1, 1951, what was the return. Then what was the return from February 1, 1950 to February 1, 1951, etc. up through August 2017. Then I looked at the 2-year returns (January 1, 1950 to January 1, 1952) and so on until the 30 year horizon. Plotting the maximum return, the minimum return and the average return presents some very interesting information to show you what you can expect while investing and why investing for long periods of time is so important for mitigating risk.