The document discusses the long-term performance of the stock market and factors that influence returns. It notes that stocks have offered solid long-term returns over decades, but short-term performance can vary widely with downturns of over 20%. While average annual returns are around 9-10% for rolling multi-year periods, any single year returns are rarely within 7-12% and often exceed 20% gains or 5% losses. The main drivers of long-run stock returns are dividends, company earnings growth, and shifting investor valuations or emotions, though focusing on short-term fluctuations can overlook the market's long-term upward trend. The key is having a long investment horizon and being prepared for inevitable downturns

1. The Stock Market
A Wealth of Common Sense Explains
By Ben Carlson
www.awealthofcommonsense.com

2. Stocks Have Offered Solid Long-Term Returns...
From 1928 to 2012, the S&P 500 returned 9.3% per year.
And since 1900,
the general trend
in the market
has been up and to
the right
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3. …But Stocks Do Go Down By Large
Amounts Periodically
Since 1928, there have been 20 periods with a decline
of 20% or more in the S&P 500 as seen in this graph:
Source: Motley Foolwww.awealthofcommonsense.com

4. Stocks Rarely Perform Around the Average
Long-Term Return in a Given Year…
• Since 1928, only 5.9% of the time has the S&P 500
finished the year with gains of between 7% to 12%.
• While 35.3% of the time it has gained more than
20%.
• And 22.4% of the time is has lost more than 5%.
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5. …But Longer-Term Returns Are Fairly
Consistent
Average Calendar Year Rolling Returns for the
S&P 500 from 1928 to 2012:
Average Rolling 5 Year Returns 9.8%
Average Rolling 10 Year Returns 10.4%
Average Rolling 20 Year Returns 11.1%
Average Rolling 30 Year Returns 10.8%
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6. Stocks Can Be Very Risky in Shorter
Time Frames…
S&P 500 Loss
January 1973 to October 1974 -48.2%
October 19, 1987 -20.5%
March 2000 to October 2002 -49.1%
October 2007 to March 2009 -56.7%
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7. …But Risk Generally Decreases Over
The Long-Term
Standard Deviation of S&P 500 Returns From
1928 to 2012:
1 Year Calendar Returns 20.00%
Rolling 5 Year Returns 8.61%
Rolling 10 Year Returns 5.83%
Rolling 20 Year Returns 3.41%
Rolling 30 Year Returns 1.58%
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8. The Drivers of Stock Returns Are
1. Dividends
2. Company Earnings Growth
3. Emotions (Changes in Valuations)
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9. 1. Dividends
From 1871 to 2011, the U.S. stock market
returned 8.83% per year with reinvested
dividends; without dividends reinvested it only
returned 4.13%. (Source: Shareholder Yield by Mebane Faber)
Dividend yields have
been fairly stable over
the years
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10. 2. Earnings
Earnings growth for the companies that make up the S&P
500 has also seen a long-term trend in the right direction:
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11. 3. Emotions (Valuations)
But how much investors are willing to pay for earnings changes quite often:
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12. Because of These Emotions Stock Markets
Can Go Nowhere For a Long Time…
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13. …Or Become Quite Bubbly
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14. Lessons?
• Have a long-term investment outlook
• Know that there are risks over the short-term
• The reason stocks have higher long-term returns is
because there is the possibility of short-term losses
• Don’t invest in stocks unless you can ride out
periodic losses
• Don’t invest in stocks if you need the money in a
short period of time
• Don’t look at your portfolio balance on a daily basis
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15. For more information visit
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*Source for all S&P 500 return and graphical data used in this presentation comes from
http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html &
http://www.econ.yale.edu/~shiller/data.htm
All other calculations are my own.
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