NOTE: This post is part of an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice. No rational person would make investment decisions based on a blog post. Please consult with your financial advisor before taking any action. If you wish to have specific advice for your situation please contact Polaris Financial Planning. Recently, I had a friend tell me that their broker said they can help them make a 100% return in just one year. My friend wanted to know if this was a reasonable expectation.
The answer was very easy - NO.
An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
It is a much better reference than the Dow which has just 30 stocks. Look at the image below and you can see the Year-to-date return. So, From Jan 1 2012 to Feb 28, 2012 the S&P 500 has gone up over 9%. The is fantastic. The graph is for a total of one year and you can see that the market when up and down - this is called volatility. The return over 12 full months can be seen in the lower right had corner (3.39%). You could have made far more money in 2 month than in 12 if you knew when the market was going up.
The problem is that you don't know when the market is going to go up. 3 years ago people were worried that the market was going to fall and look at what happened (below). Total 3 year return of 100%. If you put $100,000 in the S&P 500 index 3 years ago you would now have $200,000!
As you may have guessed the market does not always go up. The total return over the last 5 year has been -3.43%. Your money would have done better under your mattress. If you invested $100,000 5 years ago you would have seen your investment fall to about $50,000 in just two years. Then three years later it would be worth about $97,000.
So, it depends on the time frame that you are looking at. The stock market is NOT a good place for short term investing. It can go up or down a lot in just a year or two. However, over the long term 20+ years you can estimate a return of around 9-11% per year.
So, if someone tells you what the market is going to do in the next year - it is only a guess. You can very easily turn your investing into gambling. You may win big or you could lose it all. Be careful with your money and get a long term plan. If you need help contact me at Polaris. You can use the contact tab above.