TL;DR

The stock market’s unlikely to keep giving 15% returns yearly. Stock prices depend on earnings and how much people will pay for them, both currently at high levels, making consistent high returns unrealistic.

Story

“Will the stock market keep going up and up like a rocket? Probably not,” I mutter to myself, adjusting my worn-out glasses. I’ve seen enough market crashes to know better than to believe in endless growth. People are saying the S&P 500, a big basket of important company stocks, will keep giving us 15% returns each year. Let’s be real, folks, that’s a fantasy. Stock prices depend on two things: how much companies earn (like your allowance) and how much people are willing to pay for those earnings (like how much you’d pay for a rare Pokémon card). Dividends, those little payments companies give to stockholders, have been pretty low lately, like 1-2% a year. And the price of stocks? Well, that’s partly about how much companies’ earnings grow—historically about 6% a year, not 15%. The other part is how much people are willing to pay for those earnings. Right now, they’re paying a lot, which usually means they’re overly optimistic. Historically, the S&P 500 has returned about 10%. Some people think it will return 7-9% while others believe this bull market will continue. What if those high prices go back down to normal? Boom, your returns could shrink to zero over the next ten years. Don’t put all your eggs in one basket, especially a basket that everyone else is piling into. Remember the dot-com bubble bursting in the late ’90s? Or the housing market crash in 2008? History has a nasty habit of repeating itself.

Advice

Don’t fall for the hype. Diversify your investments, be realistic about returns, and remember that what goes up can come down.

Source

https://www.reddit.com/r/investing/comments/1hzy2u2/no_the_sp500_will_not_keep_compounding_at_15_per/