Investing in the stock market comes with the expectation of long-term growth, but it’s essential to understand that the market’s annual returns rarely align perfectly with historical averages. While the long-term average return of the stock market has been around 8-10% per year, investors should not expect to see this return yearly. Instead, returns tend to be highly variable, with some years delivering substantial gains and others producing losses.
Many investors assume that if the stock market’s long-term average return is 8-10%, they should expect this kind of return consistently. However, market history tells a different story. The market rarely delivers returns that match its long-term average in any given year. Instead, investors experience ‘lumpy’ returns—some years well above average and some below.
For example, there have been years when the market has soared by 20% or more, significantly outperforming the average. On the other hand, there have been years when the market has dropped by 20% or more, leading to significant short-term losses. The reality is that market returns fluctuate widely, and the path to long-term gains is anything but smooth.
Some investors attempt to avoid market downturns by trying to time their entry and exit points. However, this strategy is extremely difficult to execute successfully. To be effective, an investor would need to correctly predict both when to get out of the market before a decline and, more importantly, when to get back in before a recovery. The problem is that market recoveries often happen quickly and unexpectedly. Many of the market’s best days occur shortly after its worst days, meaning those who exit during downturns often miss the subsequent rebound.
Because the market is typically at its lowest point when investors feel the most pessimistic, getting back in at the right time requires overcoming emotional biases. Studies have shown that missing just a handful of the best market days can significantly reduce long-term returns, making market timing risky and often costly.Investors who enter the market expecting steady, predictable returns are often caught off guard by volatility. While long-term trends point to positive returns over decades, short-term swings can be extreme. Successful investing requires understanding that some years will be strong, others will be weak, and some may even be negative. The key to long-term success is remaining invested through all market conditions rather than reacting emotionally to short-term fluctuations.
Sticking to a well-structured investment plan is crucial because short-term returns are unpredictable. Trying to predict which years will be good and which will be bad can lead to costly mistakes, such as pulling money out of the market during downturns and missing out on subsequent recoveries. History has shown that the market eventually rewards patient investors who remain committed to their strategy, even during turbulent times.
The long-term average return of the stock market is a valuable benchmark, but it’s important to remember that actual returns vary widely from year to year. Investors should prepare for a mix of above-average and below-average years, knowing that volatility is a natural part of the journey. By maintaining a disciplined approach and embracing the market’s ups and downs, investors can maximize their chances of long-term success.
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Tyler Robertson
Financial Advisor
Assante Capital Management Ltd.
Tyler Robertson is a Financial Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact him at 905-771-5200 or visit www.tmfg.ca to discuss your circumstances prior to acting on the information above. Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
