December 13, 2018

Stocks have had significant returns over time, as demonstrated by the chart above.  Since 1970, $1 invested in the S&P 500 Index has grown to $126 after a return of +10.4% per year.  A globally diversified, small-cap and value “tilted” index portfolio has done even better — $1 grew to $453 in the DFA Equity Balanced Strategy Index after a return of +13.3% annually.  Both of these are significantly higher than the rate of inflation, CPI has averaged only 4% per year over this period.

Of course, as we’ve been reminded of since mid-September, much of this return comes because of the significant short-term volatility exhibited by even diversified portfolios.  But there’s one way you can reduce the risk of stocks: hold them longer. It’s a controversial idea, but the data clearly indicates that stocks have become safer the longer you hold them.

Looking at all 586 months since 1970 for the DFA Equity Balanced Strategy Index, we find that returns have been positive in 392 of them, or 66.9% of the time.  The range of returns, even at one-month intervals, has been extreme: -22.7% to +21.0%.

Moving out to a year, there have been 575 rolling 12-month periods since 1970.  The DFA Equity Balanced Strategy Index was positive in 476 of them, or 82.8% of the time.  The range of returns, however, was even more extreme: -51.2% to +82.9%.

At the five-year mark, the probability of a positive return has continued to go up but the range of returns began to moderate.  Of the 527 rolling 60-month periods since 1970, only 11 were negative, meaning the DFA Equity Balanced Strategy Index was positive 97.9% of the time.  The range of returns was -5.6% to +34.2% per year.

Finally, at the 10-year interval, we no longer see any negative returns.  All 467 rolling 120-month periods have been positive for the DFA Equity Balanced Strategy Index, with returns ranging from +3.1% to +24.6% per year.

Despite a relatively long period of time, this data doesn’t guarantee that the future will look exactly like the past or that we’ll not experience any 10-year periods of negative returns in the future.  It does say, quite conclusively, that in the past the risk of stocks had decreased considerably as we’ve pushed our observation period out from a few months to a few years or longer.  The lessons for today are obvious — declines like the one we’ve seen recently aren’t an anomaly, they happen regularly and are a part of a successful long-term investment experience assuming you don’t sell out before markets most likely recover.  Stocks are, as it’s been said, for the long run. 


Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.