Analysis of Long-Term Return – Equity Market

Ask any market participate for their estimated long-term rate of return from equity market and majority of the time they will say 9%-10%.  That's a fact most of us know.  What market participants may not know is that the average is obtained through big volatility and market never return 10% year in and year out.  The nature of the market is to overshoot on the upside as well as the downside.

Let's take a look at the market return of the S&P 500 from the start of its inception in 1957 through 2013.  The average return for this time frame is 9% per year.  Interestingly, we rarely see returns in the range of 9% plus or minus 3% deviation.  Out of 64 years, we saw only 7 instances (11% of the time) when  the market registered a return between 6% to 12% (a 3% standard deviation).  We'd have to widen the range to 11.2% standard deviation to achieve a 50/50 split.  This mean that out of 64 years, the market had a gain/loss between -2% and 20% in 32 years.

What does all of this mean?  Simply put, don't expect an average gain, of +10%, from the equity market in the short-term. As the chart shows, market return are nearly random with gains as high as 44% and losses as big as -38%.