There are some who doubt stocks can continue delivering superior returns over time. Those folks should have greater faith in capitalism and/or should revisit Chapter 1.
But then, there are those who believe in the long-term superiority of stocks. Absolutely! Stocks should average 10% a year from here until eternity. Their faith is so sure, they believe they can skim 10% off the top—easy, peasy—every year.
I share their optimism, to a point. I’m not blindly convinced stocks must average 10% annually in the long period ahead. My guess is they easily beat bonds over long periods and by a wide margin, and long-term returns are likely to be near the 10% historic average but could easily be a bit more or a bit less. But planning to skim 10% a year is a recipe for total disaster: It ignores the huge variability of returns.
As discussed in Chapter 1 and elsewhere, the variability of stocks’ short-term returns is one reason stocks have superior long-term averages. We all would love stock returns to be steadier (read more in Chapter 17), but that’s not reality.
Exhibit 7.1 shows S&P 500 annual return ranges and frequency. The most common result by a plurality (37.2% of all years) is years when stocks finish up huge—over 20%. Next, stocks are most commonly up between 0% and 20%—but rarely are they near 10% on the nose.