When designing a portfolio based on risk tolerance, we often arrive at an estimate of the portfolio’s expected return. An aggressive portfolio will have a higher expected return versus a more conservative portfolio. For example, a 60/40 allocation may have an expected return of 10.8%. One thing is certain. The 60/40 allocation will likely never hit exactly 10.8%. The graph below demonstrates the path a portfolio takes to arrive at it expected average return.

Since 1926, the US stock market has rewarded investors with an average annual return of about 10%. But it’s important to remember that returns in any given year may be sky-high, extremely poor, or somewhere in between. 

  • Annual returns came within two percentage points of the market’s long-term average of 10% in just six of the past 94 years
  • Yearly returns have ranged as high as up 54% and as low as down 43%
  • Since 1926, annual returns have been positive 69 times and negative 25 times

Understanding the range of potential outcomes can help you stick with a plan and ride out the inevitable ups and downs.