The Average Returns on the Stock Market

Written by palmer owyoung
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The Average Returns on the Stock Market
Getting average returns on stocks (stock market analysis screenshot image by .shock from Fotolia.com)

The majority of mutual fund managers don't even match the performance of the S&P 500, which is used as a benchmark to measure a fund's performance. You might often hear investment advisers telling you to invest for the long term of between five to 10 years so that you can get the average returns on the stock market. The problem with that advice is that bear markets can last several years, which can severely bring down your average.

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Purpose of the Stock Markets

The main reason for stock markets to exist is to raise capital for companies by selling ownership of it to the public. This is beneficial to the investor because it allows them to participate in profiting alongside a company if it is successful. It is a benefit to the company because it allows them to raise funds for growth without having to go into debt. For the investor, it also allows them a more liquid asset than something like real estate.

The Efficient Market Theory

This theory says that whatever price that the market is currently at is fair value and reflects all currently available information. What this means is that prices are accurate and there is no way of predicting future price, which means that there is no edge to be had and so people who try to time the markets cannot possibly win. So the theory suggests that everyone would be better off just putting money in an index fund. While this is a nice theory, it would mean that investors like Warren Buffet, who has consistently beat the markets for the past 40 years, couldn't exist.

Average historical returns

Looking at the S&P 500 index from 1939 to the end of 2009, the index grew at a 5.6% annualised rate. If you used compounding, then it would have grown at a 9.2% rate. The S&P 500 is comprised of 500 companies in the United States. It is used as a benchmark to measure the performance of mutual funds and other investment entities.

Mutual funds

These are the most common investment vehicles for investors in 401Ks and pension funds. In other words, this is where the average investor puts their money. Most people believe that because these funds are well-diversified that their money is safe. However, this is not necessarily the case. In 1999 and 2008, when markets took large falls, people lost 40 to 50 per cent of their funds over the course of a few weeks. In most cases, mutual funds underperform the S&P on an annual basis after you subtract for management fees. In other words, most investors would have been better off simply putting their money into a no-fee index fund, which matched the average returns of the S&P, than to pay to have their money managed by a mutual fund.

Beating average Returns with Technical Analysis

Use the 200-day moving average you want to get better than average returns. If the S&P index is trading above the 200-day moving average then you will want to be a buyer of the market. Likewise, look to buy stocks that are above it as well. When the markets are below the 200-day moving average look to stand aside or sell your positions. In a study done with 20 years of data, by Larry Connors from TradingMarkets.com, he showed that markets that are above their 200-day moving average have a better chance of rallying than those below it.

Beating Average Returns with Fundamental Analysis

In his book "How to Make Money In Stocks," William O Neill reveals the common traits among winning stocks in a study done over the course of 25 years. He looks at things such as an increase in quarterly earnings, institutional sponsorship of a stock, and the direction of the market indexes to find winning stocks. He boils down this criteria into an online analysis tool available at Investors.com. You can simply plug in the ticker symbol of the stock that you are interested in, and it will give you a rating of the stock from A-E.

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