Annualized Returns Stocks

Annualized Returns Stocks

Is Historical Data a Guide for Future S&P 500 Performance and Returns?

In January 2000, I studied the historical data chart of the S&P 500. My objective was to look at the past returns and try to predict future performance. My conclusion was that I was mad not investing in the stock market. My salary was good but my friends were making a fortune in the stock market.

I became greedy and invested most of my savings in tech funds and general mutual funds. We all know what happened after that. The S&P 500 returned minus 10% in the year 2000.

But my SP500 data chart showed that also during 1990 and 1994, the returns were negative and that these years were followed by years with very good performance. With this history in mind, it seemed I had nothing to fear. But reality turned out different and I lost 41% of my savings.

My Lessons from Not Looking at the Trend

1) Historical SP500 returns are no guarantee for any future returns.

2) The patterns in annual returns of the past do not predict the future.

3) Last year’s return does not tell you anything about this year.

What I have learned since is that I need to look at patterns in the daily and monthly closing price of the S&P 500. Looking at the annual SP500 performance history does not give you the full picture.

Therefore, I base now my stock market investment decisions on the analysis of a number of Trend Signals. I do this once per month. That is sufficiently frequent for a long-term investor. These Trend Signals provide me with an objective indication of the most likely direction of the trend as it is at this moment in the S&P 500.

These signals told me to sell the funds I owned at the end of 2007 and to buy them back in the beginning of 2009. That was great long-term market timing.

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