Average sharemarket returns are great, but returns are rarely average

30 November 2023

Mark Lister
Average sharemarket returns are great, but returns are rarely average

Shares have delivered impressive long-term returns.

The US is the biggest market in the world, and its long history lends itself well to analysis.

Between 1900 and today, US shares have returned 9.8 per cent per annum (including dividends). That means an investor has, on average, doubled their money every 7.4 years.

Not bad at all.

That’s a recipe for wealth generation, and an excellent way to ensure your capital grows more than inflation (which has been three per cent per annum over that entire period) and your purchasing power is maintained.

However, what’s equally interesting is to consider the typical return in any given calendar year. I did that, and the results surprised me.

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We know the average return since 1900 is just shy of ten per cent, so we can probably take a couple of per cent either side of that and assume a good portion of the almost 124 years since then will fall into that returns zone, right?

Actually, not so much.

In all those 124 years, there were merely four where the return was between eight and 12 per cent, despite the average over the entire period being very close to ten.

Take a minute to process that. Just four times.

Those years were 1912, 1993, 2004 and 2016. Every other year has been outside of that range, in many cases by quite a wide margin.

There have been 32 years when the market was down, including seven examples of it being down more than 10 per cent and another eight where it was more than 20 per cent lower.

Predictably, the worst two years of all were 1931 (when US shares fell 39.3 per cent) and 2008 (when the market slumped 37.0 per cent during the GFC).

It’s not all bad though.

For a start, the market has gone up most of the time, with 92 positive years out of those 124, a very reasonable hit rate of 74 per cent.

There have been 46 years where US shares risen more than 20 per cent (including this year), which is more than a third of the time.

That includes 16 years where it gained more than 30 per cent, and four where it rallied more than 40 per cent.

In short, the average sharemarket return has been about ten per cent, but returns are rarely close to that average. There’s huge variance, with little consistency from one year to the next.

When you hear people talk about the highly attractive returns sharemarkets have generated over the long-term, they’re not exaggerating.

It’s just that these returns don’t come in a consistent manner.

Calendar year total returns for the US sharemarket since 1900

Source: Robert Shiller, BLS, CIP. Grey area denotes 8-12% return zone.

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As a share investor you’ll do very well over the long-term, there’s no question about it, but year-in year-out anything can happen.

Don’t be put off by such variability, this is simply the price we pay for those above-average returns.

The market goes up in three out of four years, and it’s been almost six times more likely to see a 20 per cent rise (that’s happened on 46 occasions) than a 20 per cent decline (we’ve seen that just eight times since 1900).

The lesson is always the same. Stay the course, understand (and accept) the risk and return trade off, and keep your eye on the long game.

If you can do that, history is on your side and you’ll succeed as a share investor.

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Mark Lister

Mark Lister

Investment Director
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Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.

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