In 1926, the Montreal Maroons won the Stanley Cup, defeating the Victoria Cougars three games to one in a best-of-five series. There were no Olympics in 1926, although Canada did win the men’s hockey gold in 1924, represented by the Toronto Granites, while the US took silver. Fun fact: Canada outscored their opponents 110 to 3!

In economic news, Canada returned to the Gold Standard in 1926, aiming to stabilize its currency and restore confidence in international trade. The country was also in the midst of a political and constitutional crisis, which was settled by the Balfour Report. This report formally declared that Canada and other Dominions were equal, self-governing nations within the British Empire. Meanwhile, the U.S. stock market, as measured by the S&P 500 (then known as the Composite Index), delivered a total return of 11.62%, including dividends. This marked the first year of the index, and since then, the S&P 500 has averaged 10% per year. This raises the question: why do most investors not make 10% over the long term?

Investor risk appetite, which is affected by emotional swings within market cycles, rises during large market upturns like 1933 (53.99%) and 1954 (52.62%) and decreases (read: investors become fearful) when markets pull back, as they did in 1974 (-26.47%) and 2008 (-37.00%)*. Fear, combined with markets pulling back, means our phones do not ring with investors calling us to add capital to their falling accounts, even though it is the optimal time to do it.

Even more interesting is that although the long-run average is 10%, the market only averaged between 8% and 12% seven out of the past 100 years. Coincidentally, 1926 was one of those years. That means that 93 times out of 100, an investor did not get an “average return”, and this is exhibited in the graph below. This fact can be grating to investors on an emotional level and explains why money flows out of the market when returns are below average, even though investors know pulling money out of the market hurts their long-term, real-world return.

 

Chart source: https://my.dimensional.com/chmedia/333079/source/the-bumpy-road-to-the-markets-long-term-average.pdf

Since 1926, returns have been positive 74 times and negative 26 times, so the odds are on your side if you are a long-term or accumulating investor. If you are a retired investor, we insist on a cash bucket because having it provides a level of comfort and stability so you can stay the course and deal with the reality that the market does go down roughly one out of every four years. Avoid distraction, stay the course, and focus on your long-term goals. That is the path to these average returns.

Randy, Ian, and Harrison

*Rates of return source: https://www.slickcharts.com/sp500/returns