Ask investors what kind of return they expect out of stocks in any given year, and many will respond with the market's historical average return.  

The US stock market has been on a winning streak, so some investors may have been jolted when the S&P 500 fell more than 6% from July 31 to August 5. 

It’s natural for investors to look for a connection between who resides in 10 Downing Street and which way stocks will go. 

You might be inclined to select investments based on past returns, expecting top-ranked funds to continue delivering the best performance 

 

Investors may become enamoured with popular stocks based on recent performance or media attention—and overconcentrate their portfolio holdings in these companies. 

This content will only be shown when vOne example is the rise of the large US technology companies known as the Magnificent 7 (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla). But the chart below shows that many fast-growing stocks have stopped outperforming after becoming one of the 10 largest stocks in the US. On average, companies that outperformed the market on the way up failed to outperform in the years after making the Top 10 list. 

Investors may be tempted to cash out of the stock market to avoid a predicted downturn. But accurately forecasting the market’s direction to time when to buy and sell is a guessing game. Missing only a brief period of strong market performance can drastically affect your lifetime wealth. 

Some investors attribute the Magnificent 7 stocks’ dominance to a “winner-take-all” environment in which a handful of companies achieve sufficient market share to hinder competition. In businesses where gaining users drives success, establishing a strong market share may be like building a moat around profitability. But that doesn’t guarantee these companies can stay on top. 

It was a year that defied expectations by many accounts. A number of forecasts predicted that the US economy would enter a recession in 2023 as the Federal Reserve raised interest rates to fight high inflation. 

Many investors may think a market high is a signal stocks are overvalued or have reached a ceiling. But they may be surprised to find out that the average returns for the S&P 500 Index one, three, and five years after a new market high are similar to those after months that ended at any level.