Market Realities: A Sobering Look at Stock Performance
As the S&P 500 continues to soar, reaching nearly 30% growth this year, it’s essential to maintain a level head and recognize that such exceptional performance is rare. According to Cathy Curtis, a certified financial planner and founder of Curtis Financial Planning, investors should be aware that the stock market’s average annualized return is around 10% over the decades.
The Unlikely Sustainability of Exceptional Growth
While this year’s growth may be impressive, it’s crucial to remember that sustaining such high returns over multiple years is highly unlikely. In fact, Morningstar Direct found that the S&P 500’s return has been larger than 2024’s in only 17 out of the last 74 years. For instance, in 1954, the S&P 500 surged over 52%, and in 1989, it returned around 31%.
The Rarity of Consecutive Years of Significant Gains
Multiple years in a row of significant gains are even more unusual. According to Deutsche Bank, if the S&P 500 rises more than 20% this year, it would be only the third time in the past century that there have been back-to-back gains of that size.
Staying the Course: A Long-Term Approach
While it’s unlikely that market returns will continue to be as high, it doesn’t mean investors should sell their stocks. Curtis emphasizes that the best way to benefit from the annualized return is to stay in the market. Ups and downs are a natural part of a healthy market, and staying invested allows you to reap the benefits of long-term growth.
Avoiding Recency Bias
Allan Roth, a CFP and accountant at Wealth Logic, cautions against “recency bias,” where investors expect recent performance to continue. Instead, he advises that reversion to the mean is statistically more likely. By understanding market realities, investors can make informed decisions and avoid getting caught up in short-term market fluctuations.
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