Setting expectations

Q: What kind of long-term return should I expect in stocks? — T.D., Lafayette, Ind.

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 percent and 11 percent. 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 percent and 15 percent.

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 percent annually. That might turn a 10 percent “nominal” gain into a 7 percent 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, Pa.

A: It depends on what investors have been expecting — because often, expectations are already built into the price.

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