Jan 22, 2019

Chart of The Week: The Annual Ups and Downs of the Stock Market

For your investing unit, this chart below shows the annual returns of the S&P 500 from 1927 through January 19, 2018.

Since investors talk in terms of returns when talking about stocks, I recommend going into detail about exactly how a return is calculated for a stock over a given period: 

(End of period price for index - beginning of period price for index) divided by the beginning of period price. 

So let's show an example and calculate what the return for 2019 has been for the S&P 500. 

For this analysis, I used a share of SPY, a security that mimics the S&P 500 index and used Yahoo Finance historical quotes

  • Closing price on December 31, 2018: $249.92
  • Closing price on January 18, 2019: $266.46

Calculation: (266.46-249.92) divided by 249.92 = 6.6%

In layman terms, if you bought one share at the closing price on December 31st or already owned SPY your security was worth $249.92 to close out 2018. As of January 18th, SPY is now worth $16.54 more ($266.46) for an increase of 6.6%. This gain is considered a "paper gain" until you make the decision to sell the stock which is when you "realize" the gain on the stock. The value of the stock while you own it will be constantly changing as the price of SPY changes by the second when the stock market is open. 

Now that we know how to calculate a stock's return, here's a chart showing the annual returns of the S&P 500 from 1927-2019 (through Jan. 18th)

Chart below from MacroTrends:

 

Questions:

  • A friend asks "Why would you ever want to invest in the stock market..I mean it dropped big time last year (2018)?" How would you respond to his question using data from this chart?
  • What are three insights you can gain from this chart about investing in the S&P 500? 
  • Experienced investors say it's difficult to invest in the stock market even though it goes up 8-10% per year on average. Agree or disagree with this statement using evidence from the chart above. 

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Help your students experience the emotional roller coaster that is stock market investing by playing STAX where students make 20 years of investing decisions in 20 minutes. 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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