Lesson Navigating market volatility
Understand the historical investment return in the market and how it can impact your portfolio.
When you start saving money, you might experience savings accounts or GICs with set rates of return that you know in advance.
So, when you think about investing in the stock market it might seem natural to ask “how much can I make in the stock market”?
The only accurate answer is: it depends.
What does it depend on? Two of the bigger factors that can impact your rate of return are:
- Your investment risk
- Your time in market
Let’s look at each of those factors individually.
How does investment risk impact my rate of return?
Riskin investing doesn’t just refer to a single factor. It refers to the overall chance that your investment can deviate from the expected rate of return. Most of us just consider the negative side of risk (i.e. lower rates of return than anticipated) but the definition applies to any variation from the expected rate (most people just don’t mind a higher return than expected).
Risks can include things such as competition from other companies, or huge factors such as a global pandemic.
Risks and returns are often correlated, which means that if you want the possibility of a higher rate of return, you might need to accept a greater risk of loss in your investments with no guarantee of return.
How does time in the market impact my investment return?
One simple word - compounding.
When you invest, you’re essentially putting your money to work earning money for you. Over time, you can put the money they earn to work for you as well by re-investing it.
If you continue that cycle and allow your funds to remain invested, they can compound and greatly increase in value over time.
What is the historical investment return of the markets?
The historical performance of individual markets can vary, but let’s take a look at the S&P 500 as an example.
The S&P 500 is an index that tracks the price of 500 large public companies listed on US stock exchanges. It was expanded to include 500 companies in 1957. Between 1957 and 2021, the index averaged an annualized rate of return of roughly 11.88%.
If you look at the TSX Composite Index 1, over the 50 year period from November 30, 1971 to November 20, 2021, the average annualized return was 7.94%.
While past performance is no guarantee of future results, this gives you some guidance as to how stock markets have performed historically over long periods of time.
1Past performance is not necessarily indicative of future returns.
