Investors should always adopt a long-term mindset, but the future might not resemble the past.
Over long periods of time, investing in the stock market is undoubtedly one of the best wealth-generation tools available to the average person. Just in the last decade, including dividends, the S&P 500 and Nasdaq Composite index have returned 328% and 237%, respectively. These are magnificent gains.
Nowadays, the S&P 500 and Nasdaq Composite index are both in record territory thanks to their impressive bull runs. It looks like investor optimism is at elevated levels.
So, is now still a smart time to buy stocks with the intention of holding them for the next 10 years? Here's what history says your returns could be.
It's all about valuation
Vanguard, a nearly 50-year-old asset manager that has trillions of dollars under management, maintains what's called the Vanguard Capital Markets Model. It analyzes historical data to try and predict what returns will be over the next 10 years.
According to this model, U.S. equities are set to produce annualized returns of just 4.7% in the next decade. That's a huge slowdown from the past decade.
It's pretty easy to understand why Vanguard's model has these muted expectations. It all comes down to valuation. All else being equal, investors should want to pay lower valuations for the stocks that they own. This adds upside to the return potential.
The S&P 500 CAPE ratio is an insightful tool to measure valuation. It says the S&P 500's current CAPE ratio sits at 34, 36% higher than what it was exactly 10 years ago. And it represents a 63% premium to 30 years ago. The takeaway is that valuations have trended higher over the past few decades.
Declining interest rates since the 1980s have definitely played a role here. As the yields that investors can earn on fixed-income securities fall, they seek higher returns in riskier assets. Consequently, more capital flows to equities. If the Federal Reserve starts to cut rates this year or next, we could continue to see valuations expand further.
More recently, however, skyrocketing tech-enabled enterprises, most notably the "Magnificent Seven," have been a key factor impacting valuations. The average return of these seven stocks was a staggering 111% in 2023. They generally trade at expensive P/E ratios. And because they currently represent just under 30% of the entire S&P 500, they can lift the valuation of the broader index.
This just means that if investors want to find companies that can outperform the market, they might want to consider under-the-radar names that aren't seeing their valuations get stretched from the AI boom.
Image source: Getty Images.
Don't be discouraged
No one really knows what's going to happen with stocks going forward. Making accurate forecasts is impossible to do consistently. Even well-respected firms like Vanguard can't do this. It's still important to figure out where things stand today, though.
However, I do believe the outlook does make sense. Investors can't pay higher and higher valuations and expect strong returns going forward. I guess time will tell what the future holds.
All of this might be discouraging for people who are early on in their investing journeys. Why put money to work right now when returns will be weak?
To be clear, I believe that it's always a smart time to invest money in the stock market. Studies have shown that trying to time the market to take advantage of the dips is a losing game. Instead, it's best to invest early and often, adopting a dollar-cost average strategy with a long-term mentality. The market will continue to reward patient investors.
FAQs
Optimistic: 6%-7% per year.
If you assume margins and P/E multiples will remain at their current high level, and expect sales and buybacks to grow at their historical rates, then you can anticipate making about 6% in returns per year over the next decade.
What happens if I hold stock for 10 years? ›
Invest for a month and those 50/50 odds decrease to about 40%. If you held US stocks for 10 years, you'd have historically ended up with a loss only 10% of the time. And if you held for 18 years, you'd never have ended up with a loss.
Is the Motley Fool any good? ›
Motley Fool Stock Advisor has a strong track record of stock recommendations with investment returns that have outperformed the broader market over the long term. Investors are still advised to diversify their portfolios with more than just Motley Fool Stock Advisor's picks.
Is 2024 a bad time to invest? ›
Expect a lot of midyear churn, with a rally toward the end of 2024. The start of 2024 is a tough act for the stock market to follow. The S&P 500 index notched 22 record highs in 2024 — all before the end of the first quarter.
Will the stock market recover in 2024? ›
Will 2024 be a good year for the stock market? So far, the S&P 500 is on track for above-average gains in 2024. The index has historically followed up a solid first-half performance with additional gains in the second half.
What is the best investment for the next 10 years? ›
Equity-oriented mutual funds, such as multi-cap, large-cap, mid-cap, or diversified equity funds, are generally recommended for a 10-year investment horizon. These funds offer the potential for higher returns over the long term. However, they carry higher risks compared to debt or hybrid funds.
At what age should you get out of the stock market? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
What is the 10 year rule in stocks? ›
The Henssler philosophy is that any money a client needs within 10 years should be invested in fixed income securities, and any money not needed within 10 years should be invested in high‐quality, individual common stocks or mutual funds that invest in common stocks.
How long should I hold a stock to avoid taxes? ›
Generally, any profit you make on the sale of an asset is taxable at either 0%, 15% or 20% if you held the shares for more than a year, or at your ordinary tax rate if you held the shares for a year or less. Any dividends you receive from a stock are also usually taxable.
What are the 10 stocks The Motley Fool recommends? ›
See the 10 stocks »
Mark Roussin, CPA has positions in AbbVie, Alphabet, Coca-Cola, Microsoft, Prologis, and Visa. The Motley Fool has positions in and recommends Alphabet, Chevron, Home Depot, Microsoft, NextEra Energy, Prologis, and Visa.
List of Top 10 SEBI Registered Best Stock Advisory Companies
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| 1. | Research and Ranking | Manish Goel |
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6 more rowsYes, for stock investors Motley Fool Stock Advisor provides good value. The $99 annual cost is reasonable for access to their analysis and successful past picks.
Which stock will boom in 2024? ›
Best Stocks to Invest in India 2024
- Tata Consultancy Services Ltd. IT - Software.
- Infosys Ltd. IT - Software.
- Hindustan Unilever Ltd. FMCG.
- Reliance Industries Ltd. Refineries.
It's never too late.
Tax systems often offer allowances and benefits for getting started investing, particularly if it is with a retirement goal in mind. Use any knowledge of the tax system you already have and apply it to your investing journey – it will benefit you.
What is the best investment in 2024? ›
5 Best long term investments
| Investment vehicle | Recommended provider |
|---|
| 1. Exchange Traded Funds (ETFs) | J.P. Morgan Self-Directed Investing Platform |
| 2. Dividend Stocks | M1 Finance |
| 3. Short-term Bonds | Public App |
| 4. Real Estate | RealtyMogul |
1 more rowMorningstar Investment Management
Highlights: 4.6% 10-year nominal returns for U.S. stocks; 4.3% 10-year nominal returns for U.S. aggregate bonds (as of Dec. 31, 2023). Following a major U.S. market rally in 2023, Morningstar Investment Management's 10-year equity outlook dropped relative to where it was in late 2022.
What is the average stock market return over 10 years? ›
5-year, 10-year, 20-year and 30-year S&P 500 returns
| Period (start-of-year to end-of-2023) | Average annual S&P 500 return |
|---|
| 10 years (2014-2023) | 11.02% |
| 15 years (2009-2023) | 12.63% |
| 20 years (2004-2023) | 9.00% |
| 25 years (1999-2023) | 7.18% |
2 more rowsMay 3, 2024
10-year, 30-year, and 50-year average stock market returns
| Period | Annualized Return (Nominal) | $1 Becomes... (Adjusted for Inflation) |
|---|
| 10 years (2012-2021) | 14.8% | $3.06 |
| 30 years (1992-2021) | 9.9% | $5.65 |
| 50 years (1972-2021) | 9.4% | $6.88 |
Nov 13, 2023
As a result, keeping a realistic rate of return in mind can help you aim for a defined target. Many consider a conservative rate of return in retirement 10% or less because of historical returns.
