Historic market returns provide a number of benefits to investors that understand how to use the data appropriately. Numerical data creates an evidence based framework that we can use as a starting point to set realistic expectations. It also provides a context to judge how well the stock market is currently performing (good, bad or average by historic standards). Every year the Ibbotson SBBI yearbook has an updated compilation of historic returns dating back to 1926. My data is a little stale, but annualized returns through 2012 worked out to the following

Of course it wouldn’t be prudent to ignore inflation. A general increase in prices slowly eats away at our purchasing power. For the 1926 through 2012 period inflation compounded at about three percent per year.

These numbers in the above two charts can be a little deceiving. Having an 87 year period to invest isn’t realistic. Most of us have about a 30 to 40 year window from when we start seriously investing to when we want to retire. How has the US stock market faired over 35 year periods?

The worst case scenario was an 8.7% annualized return for the period starting in 1929 and ending in 1963. A period that began when the stock market was at a high point prior to the great depression. On the flip side the best outcome was a 13.1% annualized rate of return for the period that began in 1933–when the market was at a low point during the depression–and ended in 1967. When you start investing can have a substantial impact on the returns that you are likely to experience. But keep in mind it’s something that is out of your control.

Another crucial take away is the difference in returns between stocks and fixed income (bonds, notes and bills). Bonds have their purpose, but their low returns can hinder portfolio growth and they don’t produce much return after inflation is accounted for. I typically look at fixed income as a tool to preserve capital and provide a steady income stream–not as a source of high returns.

To put things into perspective let’s remember we’re looking at only 87 years worth of data. A mere snapshot of time compared to the thousands of years that humans have been conducting business. While historic data can give us a perspective as to how markets have performed it in no way predicts how markets will perform. The future is unlikely to look like the past.

References
Returns Data: 2013 Ibbotson SBBI Classic Yearbook. Morningstar Inc. Chicago, IL. pp. 184-211.