Ready for an answer? Stock market returns are driven by the economic success of the companies the investors are buying. The cumulative success of all the companies in the country approximates its GDP when added to government actions. So as long as a country has an economy that grows over time, its stock market should also go up over time. The USA has a very robust economy that grows most of the time.
That is why time is your friend in the stock market. As long as you feel the US economy will keep growing during your life time, you can be confident that you can earn your 10% to 12% return in a broadly diversified portfolio if you can wait out the business cycle you are in. You can be pretty sure of getting those results over a 5 year period. You can be almost certain over a 10 year period.
Equites (the stock market) are not a zero sum game. There doesn't have to be a loser for every winner. The pie expands with the growth of the economy, so everyone can be a long term winner. That is why pension plans, endowments, and funds all have the majority of their assets invested in the equity market. Almost all of them have 60% or more of there assets in the stock market. And in most cases, you should also have a significant exposure to the stock market. We'll talk about asset allocation in the next post.
Until then, have a Happy Thanksgiving, peace and health in your lives.
Hi Larry:
My son Dan showed me this blog and I've been reading your comments with interest. You talked about returns on a broadly diversified portfolio, saying that you can be "pretty sure" to achieve 10-12% return over a 5 year period. This is certainly what history has showed, but I would be interested in your comments if you still think this will be the case in the stock market moving forward from here.
I retired in 2000, just in time to invest in a diversified portfolio and watch it go down over the next several years. It's been five years now and the Dow Jones is just barely approaching what it was in year 2000. The Nasdaq is only half of what it was in 2000. So, I don't have as much confidence in positive returns over the future long term as we've seen in the past. I would appreciate your comments in future blogs about the past five years, and what we can expect moving forward.
Many thanks. Louise and I send our best to you and your family.
George Smith
Posted by: George Smith | November 27, 2005 8:14 PM | Permalink to Comment