Market Seldom Average

One of the strongest arguments for putting your money in stock market investments comes straight from the historical record.

Over the past several generations, stocks have achieved an average return of about 10 percent a year, easily beating their competition in the bond and short-term money markets.

But don’t be fooled by that number. While a 10 percent average is a compelling reason to consider investing in stocks, you can’t turn that number into any expectation about the results you will achieve.

Indeed, you are no more likely to get a precisely average return from the stock market than you are to meet a completely “normal” person or to live a “typical” life.

Over the 46 years from 1950 through 1995, not a single one produced a gain of exactly 10 percent.

Rounding to the nearest percentage point, the closest were a rise of 11 percent in 1971 and one of 9 percent in 1965.

There were also returns as good as 45 percent, in 1954, and as bad as minus 30 percent, in 1974. Eight of those 46 years wound up with gains or losses of less than 5 percent, including a 0.1 percent advance in 1970.

So if volatility didn’t drive you batty at some point along the way, maybe boredom did.

What about over the longer term? Even if you held a diversified stock investment for, say, 10 years, chances were still very slim that your experience would be exactly at the average.

After examining all the 10-year calendar periods ended since 1935, Paul Merriman, a Seattle investment adviser and manager, had this to report: “Thirty returned more than 10 percent, 30 returned less than 10 percent, and one returned precisely 10 percent.”

The message from all this, Merriman says, is “not to put too much weight in an average. Place one foot in a tub of ice water and the other in a tub of scalding water, and on average you are quite comfortable,” he observes. “In reality, you’re in great pain.”

Yet the historical average strongly supports the idea of braving the uncertainties of stocks.

In the long-ago words of writer Damon Runyon, “The race is not always to the swift, but that’s the way to bet.”

The fact is, the returns you get over any 10-year period from bond mutual funds or money market securities are also unpredictable, since the results they get will fluctuate with the ups and downs of interest rates.

Even if you secure a known dollar return, with a single Treasury bill, for example, you expose yourself to the uncertainties of inflation. There is no way to tell how much actual purchasing power a given number of dollars will have 10 years from now.