Many of you who have long followed the financial markets are aware of why the conventional wisdom says that “stocks tend to return 10% per year on average.” This data point comes from the well-renowned Ibottson & Associates study that found large-cap American stocks delivered returns of 10% from 1926 through 2012.
Arguably, the results of this study buried the lead, as it also indicated that a basket of American small-cap stocks, now represented by the Russell 2000 Index, delivered returns of approximately 12.2% over the same time frame.
Over an entire lifetime, that extra percentage point or two makes a difference. The large-cap American stocks, which involves compounding at a 10% rate for 86 years, turns $10,000 into $52 million. The small-cap American stocks, under identical circumstances but compounding at a rate of 12.2%, produces an end result near $300 million. Obviously, the plan isn’t to wait 86 years … Read the rest of this article!