You've heard it many times: Stocks are the best-performing investments over the long term.
But just how long is long term?
Financial advisers typically recommend investing in stocks the money we won't need for at least 10 years. But 10 years -- or even 20 -- sometimes is not long enough.
By my calculations, if you put $10,000 in stocks on Jan. 1, 1999, and matched the return of the Standard and Poor's 500 Index, you ended up with just $8,705 on Dec. 31, 2008, even after counting reinvested dividends.
That's the equivalent of an average compounded loss of almost 1.4 percent a year -- the worst 10-calendar-year stretch ever for stocks as measured by the S&P 500 and predecessor indexes of large-cap U.S. stocks. The previous worst was a nearly 0.9 percent average annual loss in 1929-1938 during the Great Depression.
And yet, as late as the end of 2006, $10,000 invested in the S&P 500 Index 10 years earlier would have grown to $23,011 -- an average annual compounded gain of about 8.7 percent.
Conclusion: 10-year market returns, as reassuring as they seem when they are good, range all over the map and depend heavily on which period we are measuring.
"The returns from any particular period are an unreliable anchor for long-term return expectations," said chartered financial analysts Francis Kinniry Jr. and Christopher Philips in an article published by Vanguard's Institutional Investor Group. (In its best 10-year period, the S&P 500 chalked up average annual compounded gains of about 20 percent. Over 20 years, returns have ranged from average gains of about 18 percent to just 3.1 percent).
Yet, many investors mistakenly believe that "average" stock market returns are the returns they can expect consistently. When they don't, many abandon stocks and miss out on strong gains that often follow down periods.
The average historical long-term return for the S&P 500 Index is about 10 percent a year. But the index rarely comes close to returning 10 percent any particular year.
In the past 40 years, returns have ranged from a gain of 37.5 percent in 1995 to last year's 37 percent loss. Only twice -- gains of 10 percent in 1993 and 11 percent in 2004 -- did gains range between 8 and 14 percent.
I've run into many investors, however, who believed they would be averaging 10 percent a year or close to it all the time, or at least every few years.