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What Drives Long-Term Stock Market Returns?

By Griffin Sheehy, Financial Analyst

The most meaningful things in life tend to be more marathons than they are sprints.

Whether it’s earning your Ph.D., becoming a lawyer, or working your way up the corporate ladder, for instance, these things take time. You’re not going to decide to be a captain of industry one day and wake up the CEO of a Fortune 500 company the next day.

Similarly, it’s highly unlikely that you’ll decide to invest in the stock market one day and immediately reap life-altering benefits. No — finding success in the stock market requires a steady, disciplined approach catered toward the long-term big picture.

So, let’s assess what kind of investment behaviors influence those kinds of returns while also discussing the benefits of thinking long-term.

The Investment Landscape of the Past 20 Years

From the years 2000 to 2009, US large-cap stocks could have been accurately described as worse for wear. Anybody investing in the securities and the S&P 500 would have been underwhelmed — at best — by their returns.

Before 2000, the US stock market generated 10% annualized returns. During the “lost decade” of the 2000s, those returns were less than average all the way through.

These results led to −0.95% annualized returns in the S&P 500 during that market period.

Interestingly, these harsher times were actually good for those with diversified global holdings reaching beyond US large-cap stocks. These investors’ holdings included different facets of the market that brought forth higher returns than expected. These companies had small market capitalizations or low relative value stocks.

Then, in the 2010s, the S&P 500 ended up exceeding the point of tripling since the beginning of the decade when assessing the total return. During these years, US large-cap growth stocks have been impressive.

Though, what goes up must come down. Those market segments that performed well during the global crisis of the 2000s didn’t outperform the S&P 500 during this past decade.

What Lessons Can Be Taken from the 2000s and 2010s?

What is the main takeaway here about these two very different decades?

That a long-term, diversified investment strategy is crucial to your success as an investor.

Throughout the entirety of this time, despite periods of underperformance, international investments offered annualized returns that surpassed the S&P 500’s 5.65%.

This success extends to the past decade, as the grand total performance of those stocks for the past 20 years shows how crucial it is to diversify your portfolio with small and value stocks.

Combining such a diverse approach with a long-term outlook means you’ll have a higher chance of investment success.

Where Exactly Does Long-Term Investment Growth Come From?

The speculators and stock pickers constantly search for hidden clues that can tell them where returns will arise in the markets. The pundits and talking heads dissect the Fed’s actions and remarks and claim the answer lies there. But in reality, long-term investment growth comes from the collective earnings growth of the companies in which you are investing.


Chart illustration by Y Charts, as of March 3, 2020

So long as today’s and tomorrow’s companies are growing, innovating, and thriving, your investments will reap the benefits of their achievements over the long-term. And the key words here are, “long-term,” meaning that you shouldn’t allow short-term events or blips on the radar derail your entire investment strategy. This brings us to our next point:

The Relationship Between Volatility and Time

Lately, market volatility has been on all investors’ minds, due to the COVID-19 outbreak and the subsequent downturn that has followed. But in times of uncertainty, more than ever, it’s essential to maintain a long-term investment outlook.

When investments are held over a longer timeframe, they generally don’t show nearly as much volatility as those held for less time.

As an investor with a long-term approach, you’re likelier to weather low market periods (like during the early 2000s).

Stocks tend to have higher short-term volatility and generate more significant returns over a longer timespan than less volatile assets such as money markets.

To further endorse long-term investing versus short-term, timing the market isn’t realistic for most, and it’s risky. It often leads to panic when the market is reported to be plummeting, and everything falls apart.

Conversely, a long-term approach historically pays off. 

Yes, short-term fluctuations can be seemingly random. Still, overall economic growth and productivity are reflected in the market over the long haul.

Plus, investing long-term compared to short-term offers tax advantages on capital gains. Any gains held over a year are taxed at rates below your income bracket. Whereas, short-term gains are taxed as regular income.

At the end of the day, your future financial goals are the reasons why you are investing in the first place — whether you’re hoping to secure an early retirement or wish to pay for your children’s college education in full. A long-term strategy is the key to a more rewarding (and less stressful) investment experience.

Would you like a second opinion on your investment strategy? Want to learn more about the benefits of long-term investing? Get in touch with our team.


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