Consider everything investors have been through in recent years: a global pandemic, rapid inflation, war in Europe, and volatile stock and bond markets. It’s reasonable to feel uneasy in the face of so much uncertainty.

Now imagine it’s the end of 2019 and you know what you know now. You’re asked to predict market returns over the next three years. Will stocks be up 25%? Flat? Down 25%?

 

Growth of $1 invested in S&P 500, January 1, 2020–December 31, 2022

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As you can see in the graph above, the market was up almost 25% from 2020 through 2022.1  Too often, people look only at year-by-year returns and don’t look at the total history of returns, which can be very informative.

Distribution of calendar-year S&P 500 returns, 1926–2022

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The graph above shows that the bulk of the returns are between –10% and +40%. When you look at a histogram like this, you get a sense of the distribution of returns, rather than a forecast of what any year’s return will be.

 

Distribution of calendar-year S&P 500 returns, 1926–2022

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The returns from 2020 and 2021 were positive, with 2022 negative. These three years seem to be representative of the history of stock returns: two steps forward and one step back. Two positive years and one negative.

One of the most important principles of investing is being a long-term investor with an investment plan you can stick with. The stock market will go up and down. It always has; it always will.

What will happen over the next three years? Who knows? The good news is, if you’ve planned for the range of outcomes, you won’t have to worry about relying on a prediction.

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Source:

Dimensional Fund Advisor; S&P 500 Index annual returns 2020–2022. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.