Time periods and stock market rolling returns

If you'll recall, in last week's post, we learned that although the long term average return of the stock market is 10% per year, we would be well-advised to refrain from expecting a 10% return in  any given year . Why? Because the history of market returns teaches us that they stray well above (and at times, well below) that average. In fact, only six times in the past 92 years has the stock market return been between 8-12%.

This information is invaluable to us in two ways:

1) It informs and educates our expectations surrounding any one year's returns (and even more so one quarter's returns or heaven-forbid one month's returns).

2) It reminds us that to grow wealth using the stock market, the baseline, starting-point, most foundational thing that we can do is ...  be invested .

You may say, well, if we don't know what the market will do in any given year, why should we invest?  To which I say - you are correct in saying that in the short to intermediate-term, stocks will have periods of time where they produce returns above and below the trend-line. At Meridian, we monitor our portfolios through these periods and seek to make strategic allocations when necessary, depending on each investor's risk tolerance and time horizon. But your broader question remains: why do we invest in stocks?

Here's your answer: Stock ownership in the great companies of the United States of America (and the world, but that's a topic for another discussion) has historically demonstrated an unmatched ability to grow wealth over periods of time. I direct your attention to the chart below, which shows rolling returns from 1926 - 2016. Rolling returns means we start a new calculation in each year. So a 5-year rolling return would go from 1926 - 1931, another would go 1927-1932, and so on, all the way until 2016.

Here's what the data tells us:

99.8% of 15-year periods were positive.

94.6% of 10-year periods were positive.

87.4% of 5-year periods were positive.

74.7% of 1-year periods were positive.

So, while we may not know which direction the market will head tomorrow, we can say with a much higher degree of certainty where we will go over a period of time . And, the longer the time period, the greater the degree of certainty. This has massive implications for us. More to come…