Stocks offer a top investment choice with a 10% annual return. The S&P 500 Index averages 11% annually over 50 years, and Apple stock rose ~11,900% in 20 years. Johnson & Johnson’s dividends increased by 607% since 2000. High liquidity on NYSE and NASDAQ, with daily volumes of 1 billion shares each, reduces crash risk. Diversified investments like the S&P 500 and MSCI Global Index highlight stocks’ long-term benefits.
Long-Term Returns
Estimates from Fortune magazine suggest that the average annual return on an investment in the U.S. stock market is around 10% over time. Over the last 50 years, the S&P 500 Index has had an average return rate of about 11%, while from 1980 to today, it has averaged around 11.8% annually. This yield is much higher than the 6% annual return of bonds during the same period. In the last two decades, technology stocks significantly outperformed others, which is why the NASDAQ Composite Index returned an average of 13% annually. Long-term holding of stocks can increase capital gains more than other traditional investment methods.
Despite bear markets and economic recessions, the annual return rate of the S&P 500 Index remained between 8% and 10% from 2000 to 2020. Although the S&P 500 Index hit a low during the financial crisis in 2008, it has since rebounded and generated impressive long-term returns. The consistency of stock returns comes from the gradual growth and profitability of companies over many decades.
If you had invested $1,000 in the S&P 500 Index in 1970, it would be worth around $52,000 today. Dividend reinvestment further magnifies returns. For example, dividends and stock appreciation over the last 20 years have been a major driver of total returns for Johnson & Johnson. Stocks offer long-term return potential and compounding effects, making them an excellent choice for future investments due to their high growth potential.
Asset Appreciation Potential
The U.S. stock market has returned an annualized 10% since 1950. For example, Apple’s stock price rose from $1 in 2000 to around $120 in 2020, an increase of about 11,900%. In contrast, real estate has yielded about 5% annually, and 10-year Treasury bonds had an annual return rate of 2% to 3% during the same period.
The NASDAQ Composite Index delivered an average annual return of 13% over the last 20 years. Stock prices of Microsoft and Amazon increased by about 25 times and almost 50 times, respectively. Between 2010 and the end of 2020, Amazon’s stock price rose from $150 to nearly $3,000.
Tesla’s stock price rose from $17 in 2010 to over $700 in 2020, an increase of more than 4,000%. These figures confirm the high growth potential of stocks, particularly in technology and innovative companies.
Dividend Income
Johnson & Johnson has raised its dividend annually for 53 years, with a growth rate of about 6% per year since 2000. The dividend per share was $1.13 in 2023, a 607% increase from $0.16 in 2000. It has a dividend yield of around 2.8%. Investors can choose to reinvest dividends into more shares, enhancing their investment value and demonstrating the significant impact of dividend reinvestment on total returns.
Coca-Cola has grown its dividend at a 5% annual rate since the early days of Warren Buffett’s tenure. The dividend per share in 2000 was $0. It provides continuous growth, offering a regular source of income and financial stability during market fluctuations. Reinvesting dividends can greatly improve the overall return on an investment.
Microsoft started paying dividends in 2010, with the dividend per share growing to $2.72 in 2023, a sixteenfold increase from $0.16 in 2010. This represents nearly a 3.0% dividend yield and reflects improvements in profitability and return policies. Dividend income adds attractiveness to stock investments.
Liquidity
NYSE and NASDAQ have traded about 1 billion shares per day, while Apple’s daily trading volume exceeds 50 million shares, demonstrating good market liquidity and quick order execution. In contrast, stocks in small-cap or emerging markets typically have lower liquidity, resulting in wider bid-ask spreads and higher trading costs.
Lower collateral requirements lead to lower interest rates, reduced speculation, and stable prices. Components of the S&P 500 often have bid-ask spreads less than $0.01, allowing investors to trade near market prices and reduce execution costs. Low liquidity markets significantly increase trading costs, affecting investment strategies.
Liquidity also depends on how rapidly the market reacts to sudden events. For instance, the S&P 500 Index dropped 34% during the initial COVID-19 turmoil in early 2020 but rebounded within a few months. This shows that highly liquid markets can recover quickly and maintain trading activity after market shocks.
Diversification Convenience
S&P 500 Index funds provide broad exposure to top-capitalization stocks, covering about 80% of market capitalization. Nearly 30% of the S&P 500’s market value was concentrated in just ten companies, such as Apple, Microsoft, and Amazon, last year. Greater diversification reduces the risk of poor performance by individual companies.
Further risk reduction can be achieved by diversifying among sectors or regions. For example, international ETFs like the MSCI Global Index track over 1,600 companies from 23 developed markets and 26 emerging markets. The MSCI Global Index had an average annual return of 10.5% in 2023, lower than the volatility of individual markets. This global diversification mitigates the impact of economic downturns in specific regions or sectors and enhances investment security.
Diversification by market capitalization categories is also effective. For example, in 2023, large-cap stocks in the S&P 500 had an annual return rate of just under 12%, while small-cap stocks had a higher return rate. Investing in large-cap, mid-cap, and small-cap stocks helps diversify the investment portfolio and reduce overall risk.
