WHY We Buy Stocks

This post attempts to answer WHY we buy the Standard and Poors 500 stock index.
Consider the following Holding Period Returns:

Using monthly closes, starting 12/31/69 or almost 50 years ago to the day, these are the maximum (blue), minimum (red) and average (green) returns for the standard long-term holding periods.  For example there were almost 600 1 year periods since 1970. The largest 1 year decline was near -60%, the highest one year gain was over +40%. That answers how much we can lose in any one year!

Holding Return Table:

Despite the horrendous loss of Feb 2009, note that 75% of ALL 1 year holding periods were GAINS!

The three year periods have a much smaller high to low range. With over 500 3 year periods since the start date, annualized returns ranged from +26% to -19%. Note there were NO LOSING 15 year holding periods!  The expected/average annual return across all periods shown is over 7%.

That's why we buy and hold stocks for the long term.

Another reason we buy S&P 500 funds is that they beat over 70% of actively managed funds nearly every year! For this I send you to SPIVA or S&P Indices Indexology webpage, which does a fantastic job of tracking S&P 500 relative performance.

Final note: Yes, the Nasdaq stock index does consistently beat the S&P500 except when it doesn't. The added gains from holding the NASDAQ do not, IMHO, outweigh the added risk, that is, the larger losses or drawdowns experienced by the NASDAQ. So yes, there are gains to be had but all index gains are at the price of suffering tough drawdowns. S&P 500's Feb 2009's drawdown was hard to live through. It was worse for the Nasdaq.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.