The Unforeseen Distribution of Stock Market Returns

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This article originally appeared in ETF.COM here.

Investors would do well to learn from deer hunters and fishermen who know the importance of “being there” and using patient persistence, so they are there when opportunity knocks.

– Charles Ellis, on investment policy

One of my favorite sayings is, “If you think education is expensive, try ignorance.” This is certainly true about investing, which is why I believe that knowledge of investment history is an important, if not necessary, condition of achieving success. The following is offered as evidence.

Distribution of returns

Most investors know that the U.S. stock market has historically returned about 10%: Over the 92-year period from 1927 through 2018, the S&P 500 returned 10.1%. If we were to remove the returns of the best 92 months over that period (not the best month each year, but the highest-returning 92 months of 1,104 months), what would you guess was the return of the remaining 1,012 months? I believe most investors would be shocked to learn that the answer is virtually zero.