Let’s take a look at historical U.S. stock market returns. Just to have a little fun.
I think 30 years is a long enough time frame to look back and see what the U.S. stock market has done in recent history.
- From 1994 to 2004 the annualized S&P 500 return was 11.06%.
- From 2004 to 2014 the annualized return was 6.99%.
- From 2014 to the end of 2023 annualized return was 12.4%.
In total, from 1994 to the end of 2023 the S&P 500 had an average annual return of 10.06%.
Here are a few more stats courtesy of Ben Carlson:
- The U.S. stock market was up 80% of the time over the past 30 years.
- The stock market was down double digits four times, but up double digits in 19 out of 30 years.
- Four out of every 10 years the S&P 500 was up 20% or more.
- The best annual return was 37% while the worst yearly return was -37%.
Now think about all of the major world events that have happened since 1994.
We’ve experienced five presidential administrations, the dot-com bubble, a 50% crash, 9/11, a housing market crash, the Great Financial Crisis (which came with another 50% drawdown), a myriad of wars, three different recessions, and to top it all off, a global pandemic. And I’m sure I’m missing others.
Yet, despite all of the turmoil and uncertainty over the past 30 years, the stock market was up over 10% per year.
For those who may be thinking that 10% a year seems modest, let’s put some dollar amounts to these numbers to show how compound interest works wonders with consistent returns over time.
A 10.06% annualized return equates to a total return of 1,673%.
If you would have invested $1,000 in January of 1994, your investment would have grown to $17,732 today. You would have almost 17x your initial investment simply by investing once and waiting.
However, most people rarely invest one time and then forget about it. So let’s say each and every month from January of 1994 until December of 2023 you stashed away $1,000.
If you had put that money into a savings account, you would have $360,000 in 2024. The math is easy on that one, a thousand dollars a month for 360 months.
If you had instead invested that money into the S&P 500 every month, your money would have grown to a whopping $1,964,356.
Pretty cool.
The magic of compound interest is what allows you to turn your modest, consistent investment contributions into large sums of wealth.
Still, while compound interest is amazing, many fail to reap the rewards of it because of the time and patience it requires. And the reason it requires time and patience is the majority of the gains from compounding come at the end. It’s the opposite of getting-rich-quick.
Using the example above, if you had invested $1,000 every month from 1994 to 2014 (20 years) and stopped, your balance would be $548,148. You would have slightly more than doubled your total contributions.
But if you stuck it out for just 10 more years, your wealth would grow from $548,148 to almost $2,000,000.
“Average returns for an above-average period of time = extreme outperformance.
It’s the most obvious secret in investing.” — Morgan Housel
Now will this stock market performance continue for the next 30 years? Only time will tell.
There are no guarantees when it comes to investing. The words “never” and “always” don’t exist in financial markets. Risk and return are tied at the hip, you can’t have one without the other.
However, if history is any indicator, the stock market rewards those who save and invest their money over time.
Thanks for reading!
This article was originally featured on “Money Talks” Substack.
Jake Elm, CFP® is a financial advisor at Dentist Advisors. Jake a graduate of Utah Valley University’s nationally ranked Personal Financial Planning program. As a financial advisor at Dentist Advisors, he provides dentists with fiduciary guidance related to investments, debt, savings, taxes, and insurance. Learn more about Jake.