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According to CNBC, the average annualized total return for the S&P 500 index over the past 90 years is 9.8 percent. That’s based on data gathered from LPL Financial.
That means that if you were to invest your money in the S&P 500 index (from buying a stock like SPY), the average return you would have gotten would have been 9.8%.
If you were to buy and hold for the long term, like Warren Buffett advised, then there is a compounding effect. Let’s say you invested $1,000 in the market and got a 9.8% return. You’d walk away with $98 of profit for the year and a total account balance of $1,098.
If you then took your $1,098 and got a 9.8% return the next year, then your profit would be $107.60 for that year. So your return after 2 years would not simple be two times the 9.8%, and that’s due to the compounding effect.
Of course the return varies a lot from year to year. So it’s certainly not like you can just invest your money in the S&P 500 index and expect to make a 9.8% return on the nose. There are of course years with stock market crashes. There are also years with “irrational exuberance”.
With all those things considered, there’s a pretty good argument here for a buy-and-hold strategy on the S&P 500. It certainly appears to be one of the best ways to make money in the stock market. The returns compound over time, but only if you don’t pick and choose when to get in or out.