How to Achieve Predictable Stock Market Returns

by · 13 comments

The idea that stocks provide fairly predictable long-term returns is one of those fundamental beliefs upon which practically the entire investment industry is based. Lately however, I’ve seen a lot of people questioning the validity of that assumption.

And I can’t blame them. Having your portfolio decline in value by 40% in one year doesn’t exactly breed confidence in the value of holding stocks. Unfortunately, volatility is the price of admission.
However, even with the atrocious results of 2008, the (very) long-term return on stocks is still excellent. For example, for the 25 years ending 12/31/08, the market–as measured by the S&P 500–earned an effective annual return of 9.71%. Not bad.

Here’s the catch: In order to have earned that 9.7% return, you actually had to stay invested in the market throughout the 25 years even when the market was going down. Most people don’t do that.

If you bought and sold several times throughout the period, your return could very well be dramatically different from the 9.7% figure. It could be much better, or it most likely is much worse.

In short, if you jump in and out of the market, your long-term returns become much less predictable.

Looking Ahead

We can say with a fair amount of certainty that market returns for the next 30 years will be somewhere in the 7-10% range. (Based on the “Gordon Equation” of dividend yield + earnings growth, as explained in Bernstein’s Four Pillars of Investing and Bogle’s Little Book of Common Sense Investing.)

What we don’t know, however, is what the market’s going to do for 2009, 2010, or any particular year in the future.

If you want predictably decent returns, then buy an all-market index fund and never sell it. At least, don’t sell it until you’re retired and drawing down on your investments.

Want to take your chances at great returns? Then pick stocks. Jump in and out of the market or switch from fund to fund every year. Just make sure that you’re fully aware that with such a strategy is as likely to harm your return as help it.

About the author: Mike writes at The Oblivious Investor, where he reminds readers to ignore the day-to-day market news and focus instead on getting investment fundamentals right. Subscribe to his blog for daily updates.

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

Money Saving Tip: An incredibly effective way to save more is to reduce your monthly Internet and TV costs. Click here for the current AT&T DSL and U-VERSE promotion codes and promos and see if you can save more money every month from now on.

{ read the comments below or add one }

  • Mark Wolfinger says:

    “We can say with a fair amount of certainty that market returns for the next 30 years will be somewhere in the 7-10% range.”

    Fair amount of certainty?
    There is no reason to believe the future will resemble the past.

  • Kai Lo says:

    I never believe in predictable stock market returns. Better off sticking with long-term investments than jumping in and out of the market.

  • PM l ON-LINE says:

    with 30 years money to be save on, I think normal health insurance or retirement insurance already do a good job with “a guarantee I think “so rather follow the chart and lose the money to the company that wont pay me full at the 25 years investment when I got accident I rather put my money away from this 7-9% yearly “profit predictions

  • B7 says:

    I don’t think 7-10% is very good. Inflation will eat up most of that.

  • Dana says:

    “Unfortunately, volatility is the price of admission.” That statement cannot be emphasized enough.

  • tom says:

    Sorry I meant what his first name is, I feel weird calling people Oblivious Investor or Moneyning (in your case).

  • ObliviousInvestor says:


    If you’re asking about the “Oblivious Investor” blog name and where it came from, an explanation is here:

    If you’re asking what is my actual name, it’s Mike Piper.

  • tom says:

    David, I certainly need to get more familiar with the industry first. Thanks for the resources.

    And I don’t want to sound rude but what is “Oblivious Investor” name?

  • MoneyNing says:

    tom: Thanks for subscribing and I’m sure you will learn lots. I encourage you to look through the archives since I write try to explain a bunch of different terms on my investing blog as opposed to mostly opinion pieces.

    Setting aside some money to invest is always a good idea but as you age and your assets grow, you will find that you need to be invested with most of your assets somewhere (real estate, stocks, bonds, and whatever else).

    First, understand that investing is a necessity as opposed to a way to get rich quick. I believe right now you are thinking about buying stocks when you are investing but investing is a much broader subject all together.

  • tom says:

    Thanks David, I am subscribed to both blogs now. And i will keep tabs on here.

    Is it make sense to first set aside like an investment fund and just use that for investing, meaning having money set aside that you can afford to loose.
    As bad as that sounds.

  • MoneyNing says:

    tom: I want to congratulate you as well on becoming debt free. I would also suggest starting off with index funds so you get the hang on how brokerages, and stocks work. This will also give you a safer way to get used to the fact that the value of your investments will change every second.

    I suggest that you start slow (ie invest only a small portion of your money to begin with), and just read all the books, blogs and everything else you can think of to gain some knowledge. Oblivious Investor writes a good blog on investing, and I have a blog on it too (you can find it on the sidebar) as do others. We all offer something different so like I said, just read, read and read.

    Good luck.

  • ObliviousInvestor says:

    Hi Tom.

    First, congratulations on becoming debt free.

    Personally, I’m decidedly in favor of using index funds rather than picking individual stocks. But of course, the decision is up to you.

    I’d suggest reading a book from each side of the argument:
    William Bernstein’s Four Pillars of Investing argues in favor of index funds.
    Peter Lynch’s One Up on Wall Street (while now a bit dated) is an excellent book that suggests strategies for picking stocks.

  • tom says:

    I am glad to see this article because I may start getting into investing myself especially since i just became debt free.

    Also this is a fantastic time to buy stocks as they are cheap.

    Do you have any other resources for those looking to invest in stocks?

Leave a Comment