NOTE: This post is part of an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice. Please consult with your financial advisor before taking any action. For planning advice contact Polaris Financial Planning.
I just had a reader contact me and ask me, "How much money should I have made in 2014?" They just got their annual statement from their broker and they made about 2.5% on their stock portfolio.
Like many things in investing - it depends. If you are in retirement you may want portfolio with a portion of your money in bonds. Such a portfolio generally has less volatility and lower long term returns. However, it can provide a higher level of certainty if you need to take money out in less than 10 years.
Stock Market Returns 2014
The Vanguard Total Stock Market Fund was up 12.43%.
The S&P 500 index (just large cap stocks) went up 11.54%. When you add back in the dividends the total is 13.69%.
The Vanguard Extended Market Fund (small and mid cap stocks) was up 7.42%
The reader that contacted me underperformed "The Total Market" by about 10% (2.5% vs. 12.43%) for 2014.
In 2014, large stocks did quite a bit better that small stock (13.69% vs. 7.42%) but the reverse is often true. Sadly, it is often difficult to find data on how "The Market" has performed over the long run. Thankfully, S&P 500 data is easy to get. Most of the data below is pulled from Wikipedia. Clearly, this is not the "total" market but over the long run results are very close to the total market.
Take a look at this year by year table and then continue to read, below the table.....
| Year | Total Annual Return Including Dividends |
| 1970 | 4.01% |
| 1971 | 14.31% |
| 1972 | 18.98% |
| 1973 | −14.66% |
| 1974 | −26.47% |
| 1975 | 37.20% |
| 1976 | 23.84% |
| 1977 | −7.18% |
| 1978 | 6.56% |
| 1979 | 18.44% |
| 1980 | 32.50% |
| 1981 | −4.92% |
| 1982 | 21.55% |
| 1983 | 22.56% |
| 1984 | 6.27% |
| 1985 | 31.73% |
| 1986 | 18.67% |
| 1987 | 5.25% |
| 1988 | 16.61% |
| 1989 | 31.69% |
| 1990 | −3.10% |
| 1991 | 30.47% |
| 1992 | 7.62% |
| 1993 | 10.08% |
| 1994 | 1.32% |
| 1995 | 37.58% |
| 1996 | 22.96% |
| 1997 | 33.36% |
| 1998 | 28.58% |
| 1999 | 21.04% |
| 2000 | −9.10% |
| 2001 | −11.89% |
| 2002 | −22.10% |
| 2003 | 28.68% |
| 2004 | 10.88% |
| 2005 | 4.91% |
| 2006 | 15.79% |
| 2007 | 5.49% |
| 2008 | −37.00% |
| 2009 | 26.46% |
| 2010 | 15.06% |
| 2011 | 2.11% |
| 2012 | 16.00% |
| 2013 | 32.39% |
| 2014 | 13.69% |
You may have noticed that in the 45 years listed there are up years and down years. The worst year was 2008 (-37.00%) and the best year was 1995 (+37.58%). This volatility scares away many investors. I feel compelled to warn you, if you need money for a car, college tuition, a new home or some other expense, in the next couple of years - that money should not be in the stock market!
If you are a long term investor the results are Fantastic! The Compound Annual Growth Rate since 1970 is 10.47%. Only 9 of the 45 years are negative (20%). 36 of the years are up.
The way to dramatically reduce the volatility is to stay in the market for a longer period of time.
(NOTE: This is based on the historical data above. Remember, Past performance does not guarantee future results)
Years performance range 80% range (cut top and bottom 10%)
1 +37.58% to -37.00% +31.73% to -9.10%
5 +28.26 to -2.35% +19.87% to -0.57%
10 +19.21 to -1.38% +18.05% to +5.86%
15 +18.93 to +4.24% +16.80% to +5.45%
20 +17.88 to +7.81% +15.68% to +8.43%
25 +17.25 to +9.28% +14.94% to +9.71%
Investing for just 5 years, the worst case is a loss of 2.35% and you have a 90% chance of doing better than -0.47% in total returns. When you look at the 10 year results the worst is -1.38% and there is a 90% chance that you will do better than +5.86%.
If you have any questions or want more information please feel free to contact me.