How “Average” is an Average Year?

As 2024 comes to an end, many investment outlooks for 2025 are predicting equity market gains in the range of ~8-12%. While this aligns with the long-term historical average for US equities, such forecasts can be misleading. A closer examination of historical performance reveals that the so-called “average” year in the equity markets is actually quite rare.

To understand this, let’s start with the premise behind these predictions. Historically, US equities – as measured by the S&P 500 – have delivered an average annual return of approximately 10% over the long term. While this number is often used as a benchmark for future expectations, it obscures a significant truth: returns in any single year rarely resemble the average.

The Rare Reality of “Average” Returns

A review of the past 50 years of S&P 500 performance demonstrates this clearly. In that time, the index has only delivered returns in the range of ~8-12% on five occasions. This means that in 90% of years, returns were either higher or lower than this range, sometimes dramatically so. Markets tend to zigzag between years of strong growth, periods of stagnation, and occasional downturns, making the concept of an “average” year misleading when applied to any specific 12-month period.

What Does This Mean for Investors?

The lesson here is that investors should avoid anchoring their expectations to the “average” return. Instead, they should prepare for a wide range of possible outcomes and remain focused on long-term goals rather than short-term fluctuations.

Here are some practical steps to consider:

1. Diversify Your Portfolio: Spread investments across asset classes and geographic regions to mitigate risks associated with market volatility.
2. Stick to Your Plan: Avoid reacting to short-term market movements. A disciplined approach, aligned with your financial goals, is essential.
3. Review Your Risk Tolerance: Ensure your investment strategy reflects your ability to weather both the highs and lows of market performance.
4. Seek Professional Advice: Partnering with a financial planner can help you navigate uncertainties and make informed decisions tailored to your unique circumstances.

Conclusion

As you consider the outlook for 2025, remember that an “average” year in the equity markets is anything but average. While long-term historical returns provide useful context, the reality of year-to-year market performance is far more complex. At Chartered Capital, we help clients build resilient portfolios and stay focused on their financial objectives, no matter what the markets bring.

If you’d like to discuss your financial goals or review your investment strategy heading into the new year, get in touch with our team today. Together, we can turn market uncertainty into opportunity.