The US stock market has had a rough run over the past month, with the S&P 500 touching a 10% decline from its highs on February 19th. In times like these, I find it helpful to take a long-term view and look back at previous market cycles to see how things turned out 3, 5, or 10+ years after a tough market environment. This perspective helps us respond less emotionally and with a long-term focus, reminding us that time tends to heal all wounds when it comes to the stock market.
The chart above illustrates annualized returns for the S&P 500 over different time horizons, dating back to 1993. The X-axis (horizontal) represents the starting year, while the Y-axis (vertical) shows the number of years from that starting point. To read the chart, locate the desired starting year along the top, then move down to the corresponding time horizon on the left. For example, to find the 10-year annualized return for an investment starting in 1995, find '1995' on the X-axis, move down to the '10-year' row, and see that the return is 12% per year over that timeframe.
Over the past 32 years, we’ve seen a bit of everything—a historic stock market run with a tech bubble in the late 1990s, the worst decade for U.S. stocks in history during the 2000s (yes, even worse than the 1930s which included the Great Depression), and a prolonged bull market that many pundits have repeatedly predicted would end over the past 15 years. While this isn’t an exhaustive record of U.S. stock market returns, it offers a solid sample size.
It's interesting to see how investment returns vary based on different starting points and holding periods, but this chart highlights two key takeaways:
- The likelihood of achieving a positive return increases with a longer holding period.
- While the starting point matters in the short term, it becomes far less significant over the long run.
If you invested at the start of any given year, you saw a positive return over a 1-year period 26 out of 32 times (81%). Over 5 years, it was 23 out of 28 times (82%), and over 10 years, 21 out of 23 times (91%). Looking 11 years and beyond? Every period was positive—100% of the time. Before I move on, let me disclose: “Past performance is not indicative of future results.”
The historical average annual return of the S&P 500 from 1928 to 2024 is 9.94%. If you look at the chart, you’ll notice that most 15+ year returns tend to hover around this range—somewhere around 8-10% per year.
Now, imagine investing on January 1, 2008. By the end of the year, you’re down 37%—the worst one-year return for the S&P 500 since 1937. It would be easy to feel like you made a terrible investment. But fast forward 13 years, and that investment delivered an average annual return of 10%, right in line with historical trends.
The longer your investment horizon, the less likely you are to see negative returns and the more time you give your money to compound.
I’ll wrap this up with a real-world example. Most investors—especially those near or in retirement—don’t hold just stocks. They also own other asset classes, like bonds, to generate income and manage risk.
Consider an investor with a $1,000,000 portfolio allocated 60% to stocks and 40% to bonds, planning to withdraw $50,000 per year—a modest 5% withdrawal rate. The $400,000 in bonds provides a crucial cushion, giving their stocks time to grow or recover after a downturn. Even if the bonds generate no returns, that investor has secured 8 years of withdrawals ($400,000 ÷ $50,000) before needing to tap into their stock holdings.
Historically, based on data from the past 32 years, there was a 96% chance that their stock portfolio would be positive after that 8-year stretch. In reality, rebalancing and other measures would likely be taken along the way, but the conclusion stands: asset allocation works – stocks drive long-term growth, while bonds and cash provide stability and income in the short term.
Chart of the Week:
There’s always an external factor tempting investors to hit the sell button. But as we just reviewed, history has favored those who stay invested through market ups and downs.
That said, there are smart, strategic reasons to sell stocks in your portfolio:
- Rebalancing your portfolio – As stocks grow, they can take up a larger portion of your portfolio. Periodically selling some stocks to buy bonds or hold cash for future income needs ensures you have income when needed.
- Reducing risks – Rebalancing also helps keep your portfolio aligned with your risk tolerance and long-term goals, preventing it from becoming too aggressive.
- Your financial goals have been met – If your goal was to accumulate $1M for a dream vacation home, and you’ve hit that target—sell your stocks and buy that house! You won!
Financial Planning Corner:
Planning opportunities in down markets
While I’ve been emphasizing the importance of 'staying the course,' that doesn’t mean you have to sit completely idle. There are strategies you can use when markets are down that can be highly beneficial—and we’ve covered them before on our blog: RSWA – Bear Market Got You Down? Here's 7 Investment and Financial Planning Strategies for When Stocks Are Down Although we’re not currently near a bear market (defined as a 20% decline), these strategies remain relevant.
These strategies include:
- Tax-loss harvesting
- Considering Roth conversions
- Reducing concentrated positions
- Rebalancing your portfolio
- Reassessing your risk & creating a plan
- Trading up in quality
- Investing cash
Quick Hits:
- The fruit at the center of the trade war. How Avocados became such a big part of the American diet and what role they are playing in the tariff fight WSJ - Why America Now Eats a Crazy Number of Avocados
- In the spirit of spring cleaning, get out your shredder and get rid of those old financial statements. Here is a guide on how long you should hold onto certain document: Better Money Habits – How long should you keep important documents?
- For small business owners, here is how long the IRS says you should hang onto documents: IRS.gov (My favorite part: “If you file a fraudulent return, keep records indefinitely”)
- Spring in New England brings maple syrup season, and that means it's time to find the perfect pancake to smother in it. Here are some favorite spots across New Hampshire: NH Magazine – Our Favorite Breakfast Spots for Pancake Season
- New European travel rules go into effect in 2025, here is what you can expect on your next trip: WSJ - Planning a European Getaway? Here’s the Latest on Travel Rules
Quote: “The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
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