The great financier J.P. Morgan is often credited with saying that he knew exactly what the stock market would do. “It will fluctuate,” he said.

The basic truth about stock markets is that they have ups and downs. Another basic truth is that, over time, markets tend to go up as the economy expands. They just don’t do it in a very straight line. This understanding serves as the foundation of all sorts of investing strategies, from indexing to dollar-averaging to long-term investing.

Average annual return of the S&P 500

Over the long term, the average historical stock market return has been about 7% a year after inflation. Looking at long periods of time rather than any one year shows something else—remarkable consistency.

For example, since the Standard & Poor’s 500 Index (S&P 500) was created in 1926, the average annual return through 2020 has been 10.7% (this figure and those that follow are before adjusting for inflation). Consider, of course, that there have been swings in the market that go into that annualized return. During the 2008 financial crisis and Great Recession, the index fell 57.7% between October 2007 and March 2009. Meanwhile, in 1933, when markets were rebounding from the depths of the Great Depression, the S&P 500 rose 54%.

Even within the 2011-2020 period, when returns were higher than the historical average,  markets swung significantly. For instance, in 2018, the S&P 500 declined 4.4%, but in 2013 and 2019, the index generated returns of more than 30%, which outweighed the lower-performing years.

10-year, 30-year, and 50-year average stock market returns

Knowing that the market has boom years and inevitable slumps, it’s useful to look at the market’s average returns over the longer term.

• The 10-year annualized return between 2011 and 2020 was 13.9%.
• If we go back further, to 1991, we see that the 30-year annualized return through 2020 was 10.7%.
• Go back 50 years to 1971, and the return was 10.8%.

Adjusting returns for inflation

As good as those  numbers might sound, they don’t tell the full story.

Inflation, which erodes the purchasing power of money, can play havoc with the returns of any investment. Accordingly, adjustments need to be made to get a clearer picture of so-called real, or inflation-adjusted, returns. For example, if you invested $1 in 1991, it would be worth $21.25 today. But that money wouldn’t have the same spending power today that it had in 1991. If you adjust for the decline in purchasing power, that same $21.25 would buy what you would have been able to purchase in 1991 with $10.93.

This is where that historical average annual return of about 7% comes from. Still, that’s better than putting money in your mattress, where inflation will actually reduce its value over time. If you want to calculate your own return and adjust it for inflation, use an inflation calculator, such as this one from the Bureau of Labor Statistics.

The stock market and long-term investing

If you look year-by-year at the last 50 years in the S&P 500, you’ll see that markets tend to deliver exactly what J.P. Morgan said they would. Following the April-November recession of 2001, markets had three years of solid losses from 2001 through 2003 (-9.11%, -11.98%, and -22.27%, respectively). Balancing these out have been gain years like 1975 (38.46%) and 1995 (38.02%).

The takeaway from looking at annual results versus a longer time frame is why long-term investing is such a powerful concept. Although analysts and advisers can predict that a pullback is due or anticipate a good year on the horizon, the unexpected can and does happen. There’s no foolproof way to anticipate losses or major gains in the market.

Ideally, an investor should, as the old chestnut goes, “buy low and sell high.” Accomplishing that isn’t as easy as it sounds. Markets that are falling can always fall more, while those that are gaining can go higher still—a disappointment to those who sell early.

Research has shown that, too often, investors buy after markets have recorded significant gains, then get nervous and sell when they fall. The typical consequences of this approach are subpar returns.

Hindsight will tell you whether you bought too high or sold low. Financial advisors and traders rely on a set of tools that generally inform them better than pure instinct. These sometimes include:

• Moving averages

  : Moving averages show price fluctuations over time; in other words, they’ll give you a sense of the stock’s general trajectory over time. A common method is to look at 50-day and 200-day moving averages. When these averages cross certains thresholds, investors sometimes use them to make buy or sell decisions.

• Business cycle

  : The economy moves up and down, from expansion to recession, in what’s known as the business cycle. Where it stands at any one point can inform an investors’ decisions. During a recession, long-term investors try to take advantage of discounted share prices, anticipating a rise once the economic slump ends.‍

• Sentiment

  : Sentiment is sometimes used to gauge the direction of the market. Are investors optimistic or pessimistic about the future? This is sometimes used by investors as a contrarian indicator.

Market timing

Statistically, investors who try to time the market or trade their way to fortune with short-term moves overwhelmingly earn returns that fail to match the S&P 500. Plus, this kind of strategy often takes up a disproportionate amount of the investor’s time and results in fees and taxes that eat into returns. It’s nearly impossible to predict market shifts consistently enough to gain an advantage over an investor who buys and holds high-quality stocks over a long period of time.

Why the market is geared toward long-term investments

History tells us that the stock market has increased more years than it has fallen. This is a basic truth that is helpful for those who are beginning to invest; it’s also what leads us to that long-term return of an annualized historical average return of 7%.

The S&P 500 has gained in 40 of the last 50 years. There’s a simple explanation for this: As the economy grows, investments might gain or lose value in any one year, or even for several years, but keeping them for a long period of time buffers the extreme moves that markets always have.