by Bruce Helmer, President of Wealth Enhancement Group

The benchmark for many discussions of investment returns is the Standard & Poors (S&P) 500. The S&P 500 is an index that includes the 500 largest companies in the United States. Because it includes the 500 largest U.S. companies (companies are added and removed each year as they grow, shrink, or go out of business), the S&P 500 is widely considered to be a good yardstick for overall stock market performance. From 1962 through 2004, the average return of the 500 companies in the S&P index was about 12 percent.

A word of caution is in order. The S&P 500 is an unmanaged index, and you cannot invest directly in that index—although some mutual funds attempt to approximate the performance of the index. The average return does not reflect the impact of any management fees, transaction costs, or expenses. And, of course, past results do not indicate future performance. Also, keep in mind that the S&P 500 returns cited are an average of 500 companies. An individual company may have fared better or worse in any year or over the course of several years, and therefore the return on investment in its stock may have been better or worse than average.

Still, it is useful to have some idea of how the broader stock market has done over time. What I find most interesting is that although the average return on the S&P 500 since 1962 is about 12 percent, only four years had returns near that average (between 10 percent and 15 percent). The returns varied greatly from year to year, ranging from a low of -26 percent to a high of 37 percent.

I want you to remember one thing from this information: Returns on stocks, the most widely used form of investing, do not go in a straight line up or down. The stock market, and therefore investors in stocks, will have some years that are better, or worse, than others. The key is that over longer periods of time, stocks show consistent appreciation as measured by a broad indicator.