The stock market explained

The Stock Market

A Wealth of Common Sense Explains

By Ben Carlson

www.awealthofcommonsense.com

Stocks Have Offered Solid Long-Term Returns...

From 1928 to 2012, the S&P 500 returned 9.3% per year.

And since 1900, the general trend in the markethas been up and tothe right


…But Stocks Do Go Down By Large Amounts Periodically

Since 1928, there have been 20 periods with a decline of 20% or more in the S&P 500 as seen in this graph:

Source: Motley Foolwww.awealthofcommonsense.com

Stocks Rarely Perform Around the Average Long-Term Return in a Given Year…

• Since 1928, only 5.9% of the time has the S&P 500 finished the year with gains of between 7% to 12%.

• While 35.3% of the time it has gained more than 20%.

• And 22.4% of the time is has lost more than 5%.


…But Longer-Term Returns Are Fairly Consistent

Average Calendar Year Rolling Returns for the S&P 500 from 1928 to 2012:

Average Rolling 5 Year Returns 9.8%



Average Rolling 30 Year Returns 10.8%www.awealthofcommonsense.com

Stocks Can Be Very Risky in Shorter Time Frames…

S&P 500 Loss January 1973 to October 1974 -48.2%

October 19, 1987 -20.5%

March 2000 to October 2002 -49.1%

October 2007 to March 2009 -56.7%


…But Risk Generally Decreases Over The Long-Term

Standard Deviation of S&P 500 Returns From 1928 to 2012:

1 Year Calendar Returns 20.00% Rolling 5 Year Returns 8.61% Rolling 10 Year Returns 5.83% Rolling 20 Year Returns 3.41% Rolling 30 Year Returns 1.58%


The Drivers of Stock Returns Are

1. Dividends2. Company Earnings Growth3. Emotions (Changes in Valuations)


1. Dividends

From 1871 to 2011, the U.S. stock market returned 8.83% per year with reinvested dividends; without dividends reinvested it only returned 4.13%. (Source: Shareholder Yield by Mebane Faber)

Dividend yields have been fairly stable over the years


2. Earnings

Earnings growth for the companies that make up the S&P 500 has also seen a long-term trend in the right direction:


3. Emotions (Valuations)

But how much investors are willing to pay for earnings changes quite often:


Because of These Emotions Stock Markets Can Go Nowhere For a Long Time…


…Or Become Quite Bubbly


Lessons?

• Have a long-term investment outlook• Know that there are risks over the short-term• The reason stocks have higher long-term returns is

because there is the possibility of short-term losses• Don’t invest in stocks unless you can ride out periodic

losses• Don’t invest in stocks if you need the money in a

short period of time• Don’t look at your portfolio balance on a daily basis


For more information visit www.awealthofcommonsense.com

*Source for all S&P 500 return and graphical data used in this presentation comes from http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html &

http://www.econ.yale.edu/~shiller/data.htmAll other calculations are my own.


http://www.awealthofcommonsense.com/

http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html

http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html

http://www.econ.yale.edu/~shiller/data.htm

Economy & Finance

The stock market explained