30 Years of Stock Market Returns: Top Pains and Gains

Jake - Author/Founder

Jake - Author/Founder

I'm Jake. I believe you can build a wealthy life through frugal living and index investing.

I’ll be turning 30 shortly. It feels timely to look back at the last 30 years of stock market returns. Specifically, I’ll look at volatility, average returns, the worst year and the best year for 3 categories of stocks.

A peek at history arms you with realistic investing expectations. This is important because of emotions.

The intensity of your emotional responses to market swings are proportional to the gap between your expectations and reality.

With weaker emotional responses, you’ll be better able to remain invested (and rational) to reap the long-run compounded returns that the market has to offer.

By reducing the intensity of emotional responses, good expectations protect you from yourself, reducing reliance on your self-discipline. 

30 Years of Stock Returns: Categories

In this post, I will look at the best and worst years of returns from three different categories of stocks from 1992 to 2022. 

The US Total Stock Market: Over 3500 stocks, spread across 11 different market sectors. The mix of stocks includes large, small, value, and growth stocks.

US Small Cap Value Stocks: A collection of small businesses with low stock prices relative to their book value. These businesses have uncertain future earnings and are therefore riskier, so they demand a higher return.   

Global Stocks Excluding the US (Global Ex-US): Includes 1000’s of global stocks excluding the US. This group can be subdivided into developed international stocks and emerging markets stocks. International developed countries include many European countries, Canada, Australia, and Japan. Emerging market stocks capture businesses in China, India, Brazil, Mexico and more.

I’ll cover compare the three categories of stocks independently, then I will look at a globally diversified portfolio that looks like this: 

US Stocks40%
Global Ex-US35%
US Small Cap Value25%
Global Portfolio Mix

How to Capture These Returns

The following low-cost Index Exchange Traded Funds (ETFs) allow investors to invest in a basket of stocks contained in an index. 

  • VTI – Total US Market Index ETF
  • AVUV – US Small Cap Value ETF
  • XEF – EAFE Index ETF (International Developed Stocks)
  • VWO – MSCI Emerging Markets Index ETF
Note that this is not advice. You are responsible for your own investing decisions. Not everyone has the risk appetite for 100% stocks, let alone SCV stocks that further amplify risk exposure.
 
Learn more about why total market index funds provide the best risk-adjusted returns

Total Returns and Volatility

Firstly, let’s look at the returns of the three categories of stocks, along with their volatility, measured as standard deviation. These are “total market” returns, meaning they include reinvested dividends.

 US Total MarketUS SCVInternationalGlobal Portfolio
Annual Return9.5%11.0%4.7%8.5%
$10k Invested in 1992$152,203$228,923$39,664$115,583
Standard Deviation15.0%17.9%16.7%15.3%

 

What is Volatility?

Volatility is the variability in price about the average return. It is a common measure of risk. 

The riskier the asset, the more volatility you can expect, meaning high upswings and sharp falls. 

For example, stocks are more volatile than bonds. And a grouping of stocks in a total market index fund will be less volatile than individual stocks. Finally, riskier stocks, like small-cap value stocks, are even more volatile.

Volatility: Stock Returns are Erratic

I  often hear “the stock market has historically returned 10% annually”. The statement is true for the US stock market from 1926-present. But I don’t like this statement. 

After hearing this, wouldn’t you expect that returns will be somewhere close to 10% each year?

That couldn’t be further from the truth.

You will rarely see a 10% return at the end of any given year. Market returns are erratic and volatile. Some years will have a negative 30% return, and other years will have a +30% return.

Over the course of decades, there will be more years with a positive return than years with a negative return. The overall return is expected to converge to the long-run average. 

Let’s look at volatility for the US market, SCV and Global Ex US. 

US Total Market Returns: 1992-2022

The US Total Market had an average compounded annual return of 9.5

Investors endured pain during the dot-com bubble burst that led to 3 years of decline from 2000 to 2002. And the 2008 financial crisis saw a 37% loss for the year. Since then, the US market has done well, until 2022. 

Even the COVID crash of 2020 saw a 30% drop. This isn’t captured in this chart because the year 2020 ended up with a positive return of over 20%. That blip was a light sting, rather than deep pain. 

The COVID crash is a reminder that these charts smooth out volatility within each year. These plots have a smoothing effect. 

US Small Cap Value Returns: 1992-2022

30 Years of US Small Cap Value Returns

The average compounded annual return during this time is 11% for US Small Cap Value stocks (SCV). SCV returns are all over the map and more volatile than other categories. 

Interestingly, SCV performed well during the US total market drawdown years between 2000 and 2002 when valuations were dropping. US SCV has the largest volatility of the three stock types. 

Global Market Ex US Returns: 1992-2022

30 Years of Global Ex US Stock Returns

The average compounded annual return during this time is 4.7% for this group of stocks. Not great, especially relative to the US market, but this is not a guarantee of future expected returns. 

Note also that this batch of stocks has lower valuations, measured by price-to-earnings ratio, relative to US Stocks. Therefore, one can expect higher expected future returns relative to US stocks.

To understand this relationship between price-to-earnings ratios, it can be helpful to read my post on  where stock returns come from. 

Worst Years

The great financial crisis shook global markets in 2008, producing the worst year in the last 30 years.

Although 2008 was clearly tough (I wasn’t investing then), it is a great year to look back on. It shows how strongly markets are correlated during down years and the magnitude of the annual drop. 

 US Total Market US SCVGlobal Ex US Global Portfolio
Worst Year 2008200820082008
Return in Worst Year-37.0%-32.1%-44.1%-36.8%
Max Drawdown -50.1%-56.1%-57.1%-53.4%

Max Drawdown: Set Good Expectations

The maximum drawdown is the largest drop from a price high to a bottom. Looking back at drawdowns, although depressing, can help you set realistic expectations.

All markets saw drawdowns of over 50% between November 2007 and February 2009. It took until 2012 for the market to recover to November 2007 levels. That’s a painful 5 years. 

How To Remain Invested

Successful long-term index investors continue on with their investing system through these painful years. Not only do they keep their money invested, but they continue to invest new money. 

Here are a few additional tips that can help good investors remain invested.  

  • They only invest money you don’t need for 10+ years.
  • They have a system in place to invest at pre-set intervals in a pre-planned portfolio, even in downturns. 
  • They don’t check their portfolio often. 
  • They resist taking on a level of investment risk that exceeds their risk tolerance. 

You can see more tips on how to remain invested in my post on Behaviour and Investing: How To Control Emotional Biases.

Best Years

Now that the depressing part is over, let’s take a look at the best years in market history. These best years tend to follow the bad years as the market rebounds.

That sounds like a case for market timing, but it is not. These “best years” are ultimately unpredictable. They cannot be “timed”.

By attempting to “time the market” you’ll likely miss these big years that are responsible for a large part of the long-run returns that stocks have to offer. 

 US Total Market US SCVInternational Global Portfolio
Best Year1995200320032003
Return in Best Year 35.8%37.2%40.3%35.3%

Conclusion

  • Stock returns are erratic, even for a portfolio with maximum diversity (global index investing). Expect some years to be up 20%, and some years to be down 20%. Do not expect the average return to materialize every year. 
  • The maximum drawdown in a 100% stock portfolio can exceed over 50% as you saw when looking at 1008. A 100% stock portfolio is not for you if you cannot handle this type of drawdown. 
  • Over the past 30 years, the worst one-year return for US Total Market index investors is -37%, and the best one-year return is 36%. 
  • A globally diversified portfolio (without SCV stocks) will maximize long-run returns for a given amount of volatility. 
Jake out.