If you’re like most people, you believe there’s a great deal of truth in the adage, “history tends to repeat itself more often than not.” That’s an important adage to keep in mind when it comes to saving and investing for retirement because it allows you to get a glimpse into the future by knowing something about the past. The fact is, the stock market has been repeating itself consistently enough throughout history to allow us to see some repeatable long-term patterns, or market “biorhythms,” which are important to recognize and understand when it comes to building a smart, defensive investment strategy.
First, you need to understand something about what particular “version of the truth” Wall Street and most brokers like to tell when talking about the stock market. Most people have probably been told that the market averages about a 9% return over the very long run. The way that breaks down is that 2-to-3% of this return comes from stock dividends, and 6-to-7% comes from capital appreciation — in other words, a 6-to-7% average growth rate over the very long run.
That may sound pretty good, but you must bear in mind something about how “averages” can be determined and why they can be misleading. If a friend told you that he jogged “an average” of 10 miles per week with his business partner, you might be impressed until he explained that his partner jogged 20 and he didn’t jog at all. Together, they do still “average” that 10 miles, so he did tell the truth, but it was a misleading “version of the truth.”
That’s kind of how that “average” growth rate is determined for the stock market. The way the 6-to-7% breaks down over the long run is that there are huge periods of time where the market experiences extreme volatility, but the net result is zero growth. Then, there are huge periods of time where the market does very well, averaging over 10% growth and often into the 12-to-15% range. Factor zero in with that high range, and there is your 6-to-7%.
