The stock market is as strong as ever, but there's a catch

Do you feel like stocks just aren’t producing the same net gains as they did in the past? It’s not a completely crazy conclusion. Things haven’t seemed the same since the dot-com crisis in 2000. Even if one ignores the extreme volatility in the meantime, long-term returns have been below average for some time.

But the fact is that the S&P 500 index is as successful as ever, posting an average annual gain of just under 10% when dividend payments are excluded. When dividends are taken into account, the typical annual yield rises to just over 11%.

But there’s a catch. Unlike most cases before 2000, you now need a 20-year holding period to ensure you get the reliable returns you expect – and need – from the stock market. An investment period of five or even ten years may not be enough.

Yes, times have changed

There was a time when mutual fund and brokerage firm marketing materials touted that there had not been a ten-year period since the Great Depression in which the market had lost ground. To the S&P 500’s credit, the 10-year rolling return track record is still respectable. Even in the face of the subprime mortgage crisis of 2008, which came so soon after the dot-com implosion just eight years earlier, this claim remains.

However, there is an alarming “just about” aspect to the data that may give pause to investors who already fear that today’s market is not as rewarding as yesterday’s stock market.

The chart below illustrates the point by comparing the S&P 500’s average annual gains (or losses) for rolling five-year, ten-year, twenty-year, and thirty-year periods dating back to 1956. The five-year and 10-year moving average gains are shown with bright dots because they are not the focus of this analysis. Note, however, that both values have been near, at, or even slightly below zero more than once since the mid-1950s.

To be fair, moving average annual returns over 20 and 30 years have not always been spectacular. The 20-year value fell to single digits in the 1970s and remained there for years. The same 20-year average growth wasn’t particularly impressive either, as it was less than 10% just a few years ago.

Still, even these below-average market returns exceeded all alternatives during this time and also outpaced inflation.

So if you want to build wealth in the long term, stocks are still the best choice. Investors simply need to adopt long-term thinking by considering a 20-year investment time frame instead of five or even 10-year time frames. The latter periods of sustained weakness could easily derail retirement plans.

Rethink how you pick stocks

But what does this mean in practical and actionable terms?

First and foremost, this means that we all need to be concerned about the longevity of companies’ business models; Will there be greater demand for this product or service in a few decades?

A name like cable television station Charter Communications comes to mind. The world will certainly continue to watch television in the future. But will consumers finally demand à la carte programming that they can purchase and stream directly from a studio, bypassing cable providers entirely?

At the other end of the spectrum, there is little doubt that we will all still be carrying some kind of connected mobile device with us in 2044.

Company-specific resilience must also be taken into account.

Take Johnson & Johnson and General Electric as examples of this not to do. Thirty years ago, both organizations appeared to be at the top of their respective games. The world needed industrial goods and healthcare goods, and these two powerhouse names had a strong track record of delivery.

In retrospect, however, it was already clear back then (to those who dug deep enough and were intellectually honest with themselves) that in most cases both companies were just buying additional revenue rather than innovating and developing. In that sense, debilitating debt has proven disastrous for even more than a few once-big names like Toys R Us, Bed Bath & Beyond, and Valeant Pharmaceuticals (now mostly Bausch).

It would also be wrong not to point out that some companies are synonymous with their founders’ CEOs for the better And for the worst. Amazon has continued to perform well since Andy Jassy took the helm from Jeff Bezos in 2021, but it’s hard to say that some of the Bezos magic hasn’t been lost. The same goes for Apple, which hasn’t been quite the same since the late Steve Jobs stepped down as CEO in 2011.

That doesn’t mean that stocks in companies with high-profile directors aren’t investable. They are often very worth investing in, even if this is not the case in the long term. It’s just a matter of finding out beforehand whether it is the company itself or its leader who makes the stock worth holding on to.

It wouldn’t be wrong to own a few either more Dividend paying names and fewer Hot growth stocks that raise safe money now rather than hoping for a bigger payout later. Because when those dividends are reinvested, the net returns of the right dividend stocks can rival those of some popular growth stocks.

Interesting fact: Data from the Hartford mutual fund company shows that since 1960, 85% of the S&P 500’s net returns have come from reinvested dividends paid by the companies that make up it.

Welcome to the new norm

With the exception of the post-war 1960s, this is no longer the case. The market used to be less volatile and more consistent when it came to making profits or at least containing losses. In the late 1990s something seems to have changed. It was most likely the advent of the Internet and the subsequent introduction of low-cost online stock trading. Since then we have seen more extreme moves in the market, both bullish And bearish.

Regardless of the reason, this is the hand that investors are dealt, so this is the hand that investors must play. Investors should worry less about predicting a stock’s future price and think more about the long-term growth prospects of the underlying company. More importantly, all investors should look for companies that they can truly hold for life, even more so than we have in the past. After all, it could take a generation for a stock to fully and adequately reward shareholders.

The good news is that in many ways this is actually a simpler and less time-consuming approach to stock selection than the performance-focused approach that too many investors currently use.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Apple. The Motley Fool recommends Bausch Health Companies and Johnson & Johnson. The Motley Fool has a disclosure policy.

The Motley Fool is a content partner of USA TODAY, providing financial news, analysis and commentary designed to help people take control of their financial lives. Content is independently produced by USA TODAY.

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The stock market is as strong as ever, but there’s a catch

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