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Simply Put

Be average, be extraordinary

September 10, 2015

Since 1926 the S&P 500 Index has averaged a 10% annual compound return. But as you can see, in any given calendar year returns were all over the map, ranging from <-12% to >34%. In fact, over those 89 years the S&P 500 didn’t even once deliver exactly 10%. The path to average was a bumpy one, to say the least.

Distribution of S&P 500 Index returns (in US$) since 1926†

It’s easy to misinterpret “average” as meaning your investment will shoot straight up and then hover around that 10% mark in perpetuity. The reality is that the stock market is typically very volatile. Over the years, returns will be much higher and yes, much lower than average. The below-average years have caused investors the most distress yet these downward fluctuations ultimately created the conditions needed to achieve that 10%. Volatility is a necessary ingredient for positive returns because among other things, it creates opportunities to buy good businesses at reduced prices as other investors flee the market.

The takeaway here is that there’s no perfect time to invest. If you can accept that, you’re left with a relatively straightforward way to navigate the market, which is this: when you’ve got money to invest for the long term, invest it. And as the market goes through volatile periods, stay invested. At the end of the day, it matters less when you invest than that you do invest. Sure, sticking to your guns will at times be tough, but will go a long way in increasing your odds of being the investor who realizes average – or above average – performance instead of the one who doesn’t (and there are many more of those investors out there). 

†Source:, Dimensional Funds.
††Source: Bloomberg LP. Bonds: Barclays Capital U.S. Aggregate Bond Index; Oil: Bloomberg WTI Cushing Crude; Gold: Bloomberg Gold Spot Price per Troy Ounce; Homes: S&P/Case Shiller U.S. Home Price Index; Inflation: U.S. Consumer Price Index; Average investor returns: calculated using Dalbar fund flow information. The average investor return is the average of equity, fixed income and asset allocation investor returns. S&P 500 Index is a broad-based, market-capitalization-weighted index of the 500 largest and most widely held stocks in the U.S. All returns annualized and in US$.