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 (through a ticker like SPY), then 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. The returns compound over time, but only if you don’t pick and choose when to get in or out.
