Historical analysis is a vehicle for analyzing the potential outcomes for a wide variety of life's activities and responsibilities, including investing in the stock market. In particular, paying attention to historical trends associated with the stock market can help you limit risk and maximize potential profit.
Novices and professionals alike can use several stock indices to help trace the aggregate movement of stocks over time. Important stock indices include the S&P 500, founded in 1957, and the Nasdaq index. These indices help analysts and investors evaluate the performance of stocks on the New York Stock Exchange (NYSE) and the NASDAQ.
Historically, since the first opening bell in 1896, the stock market has provided a rate of return of between 6 and 7 percent. While this data provides a good barometer for investors, traditionally the S&P 500 is used as the benchmark for examining stock market performance. The S&P 500 provides a snapshot of the performance of 500 large stocks, which make up approximately 80 percent of the market's value. The annual rate of return for the S&P 500 averaged 9.8 percent between 1926 and 2010.
Of course, historical rates of return provide only an overall view of stock market performance. Fluctuations can occur at any time thanks to a multitude of events, including economic booms and recessions. For instance, the 1990s were a time of historical stock market growth. In this bull market period, the stock market grew to four times its previous size. In contrast, the stock market lost 37 percent of its value in 2009 alone amid economic and regulatory concerns.
When compared with other investment vehicles, stocks still provide the greatest rate of return over the long haul. For instance, government bonds provided a 5.4 percent rate of return between 1926 and 2010 in comparison to the 9.8 percent returned by stocks during the same time period. Of course, while bonds may not provide the best rate of return over the long haul they do offer a level of protection against market volatility. Consider that bonds with a maturity of seven to 10 years fell only 1.8 percent even during the worst year in the history of bonds.
- Thinkstock/Comstock/Getty Images