In Norse mythology, Loki was a cunning trickster. Many of us know him as Thor’s brother, in the Marvel-inspired Thor and Avengers series of films. Loki’s complexity makes him one of the most popular characters in the series. He often tries to destroy Thor and the other Avengers (including Captain America, Ironman, and their superhero ilk). But Loki has a good side too, which keeps people guessing.
The stock market is a lot like Loki. Imagine Loki’s father taking the mischievous chap aside about 200 years ago. His father says, “Hey Loki, I’m putting you in charge of the stock market. I know you love to trick people. But there’s just one rule. Over 30-year durations, make sure the stock market averages between 7 and 11 percent per year.”
Loki knows his father would destroy him if he drifted far from the rule (never mess with a Norse god). So Loki ensures that stocks earn decent 30-year profits.
For example, over the 30-years between 1960 and 1990, U.S. stocks averaged a compound annual return of 10.2 percent. Over the 30-years from 1985-2015, they averaged a compound annual return of 11.0 percent. Several 30-year periods are listed below.
Loki Fulfills His Promise
30-Year Returns For The S&P 500 (with dividends reinvested)
|Starting and Ending Years||Duration||Compound Annual Return||$10,000 would have grown to:|
|Source: DQYDJ, S&P 500 Return calculator; The above data starts and ends mid-February for each year |
*Beginning January 1926, ending January 2019; Sources: Bogleheads S&P 500 returns for 1926-2017 and Morningstar for 2018 return
Annual returns for international stocks weren’t far behind. From 1970-2018, they averaged about 10 percent per year.
But along the way, U.S. and international stocks had several losing years. Loki used these years to trick investors. If he could make them abandon their long-term plans, they wouldn’t earn decent profits.
For example, we know that U.S. stocks averaged 11.0 percent between 1985 and 2015. But sometimes, investors had to wait before they saw gains. Consider a $10,000 lump sum investment in the S&P 500 on January 2000. By January 2010, it was worth just $10,360. That’s a compound annual return of just 0.32 percent over 10 years.
Much to Loki’s delight, in 2010, many people said, “You can’t make money in stocks anymore.”
But those who jumped ship lived to regret it. Between January 2010 and February 2018, U.S. stocks averaged a compound annual return of 13.71 percent.
Loki wants investors to try and time the market. He loves to sprinkle fear and greed. But investors should ignore year-by-year returns. If they’re employed, they should add money every month, every single year. No matter what the markets do, a diversified portfolio of low-cost index funds should earn decent 30-year profits.
Retirees might think this doesn’t apply to them. But fortunately, it does. If retirees withdraw an inflation-adjusted 4 percent per year, and ignore Loki’s tricks, their portfolio should last at least 30 years, even if they retire on the eve of a market crash.
Unfortunately, most investors don’t earn decent stock market profits. Too many of them expect to see profits almost every year. Unfortunately, the market doesn’t work that way. Unrealistic expectations can make investors poor if they choose to speculate. The stock market offers long-term profits, but only for those who don’t fall for Loki’s tricks.
Further Related Reading
For Regular Investors
- Why A Sliding Stock Market Is Like A Winnable Baseball Game
- How A Stock Market Crash Could Accelerate Your FIRE (to help you retire early)
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas