Setting your expectations

Q What kind of longterm return should I expect in stocks? — T.D., Lafayette, Indiana A You can’t know the exact return you’ll get over any particular period, but the market’s past performance can guide your expectations: Over the 30, 50 and 100 years ending in December 2019, the S&P 500 posted a compounded average annual gain (with dividends reinvested) of between 10% and 11%. If you invested in the S&P 500 over the past 10 to 20 years, though, your average return is likely to have been between 6% and 15%.

So hope for great results, but be prepared for lackluster ones. (To arrive at a “real” return, subtract the rate of inflation, which has historically averaged around 3% annually. That might turn a 10% “nominal” gain into a 7% real one.)

Those returns reflect investments in most of the overall stock market, not in various individual stocks. Individual companies can deliver results that are much better or worse. You can hope to beat the market’s average return by carefully selecting individual stocks or mutual funds, but it’s best for most of us to simply match the market’s return via a low-fee index fund. Q How come good news from one company causes its stock to rise, while good news from another one leads to no change? — S.L., Butler, Pennsylvania A It depends on what investors have been expecting — because often, expectations are already built into the price.

If investors are expecting a 10% rise in earnings and that’s what they get, there may be little change. If they’re expecting 10% and the company reports a 30% increase, the stock will likely jump. Not all news is really news.