John Hancock Numbers: Stocks are Volatile and That's OK

Keith Hartstein, an executive vice president at John Hancock Funds, likes playing with numbers and helping investors understand that the market has a mind of its own. Currently, he's helping investors to see that the only time the market averages the ever-popular expectations of 10 to 12 percent returns is over the very, very long haul.

"There is a myth of moderate (10 to 12 percent ) returns," says Hartstein. "In the past 77 years, the market has only returned between 10 and 12 percent a year three times. So, it's a market of extremes not moderation."

As for market extremes: Between 1920 and 1999, the market gained as much as 53.99 percent in one year (1933) and lost as much as 43.34 percent (in 1931). Both were in the decade of the 1930s.

It's also a market that can confuse. Hartstein says that most investors were told that the 1990's was the greatest decade in history for stock market returns. "Wrong," he says. " The 1950s were better."

If you're like some investors, the past few down years have made it easy to sit on the sidelines and keep your money invested only in bonds or tucked under the mattress. But hiding from equities might not be the wise. To help you understand stock market volatility --- both on the upside and the downside---here's how the S&P 500 Stock Composite Index , with dividends reinvested, performed during the last century, according to data provided by John Hancock Funds:

-The 1920s: During the decade that included the Crash of 1929, there were three down years; two years that the market was up between 0 and 18 percent, and five years in which it was up over 18 percent. As a result, the average annual return for the market in this decade was 8.,77 percent. (This is the only decade in which the annual returns are based on the Dow Jones Industrial Average. In subsequent decades, data is from the "S & P 500 Fact Book").

-The 1930s: In this decade of the Great Depression, there were six down years, four years when the S&P was up over 18 percent, and not one year when it returned between zero and 18 percent. The average annual return for the decade was -0.05 percent.

-The 1940s: The market scored big during this decade that included World War II. Five times during this 10-year period, the market was up over 18 percent; twice it was up between 0 and 18 percent; and three times its performance ended in negative territory. The average annual return for this decade was 9.17 percent.

- The 195's: Believe it or not, this decade has been the hottest to date. There were only two years when the market was down, two years when it was up between 0 and 18 percent; and six years that it was up more than 18 percent. Do the math and you'll see that during the 1950s, the average annual return for the decade was 19.35 percent.

-The 1960s: With the Cuban Missile Crisis, President Kennedy's assassinated and the Vietnam War, this decade saw three years in which the S&P was down; four years where the market was up between 0 and 18 percent; and three years where it topped 18 percent or more returns. The average annual return for stocks in the 1960's was 7.81 percent.

-The 1970s: Nixon resigned, gas was rationed and the average annual return for stocks was 5.86 percent. In three instances the market was down, in three years it was up between 0 and 18 percent, and in four years, it was up over 18 percent.

-The 1980s: During the decade, Reagan was shot, the AIDS virus was identified and we experienced the Challenger disaster. the market was down one year and up somewhere between 0 and 18 percent three times.And, there were six years where the S&P soared above 18 percent. The average annual return for this decade was 17.55 percent.

-The 1990s: If you thought that the 1990s was the hottest decade for stocks around, you'd be wrong---it was second best. During this decade that included the Gulf War, Los Angeles riots and the Oklahoma City bombing, the S&P was only down one year. There were three years where the market returned between 0 and 18 percent and six years that it returned over 18 percent. The end result was an average annual return for the decade of 18.20 percent.

- Currently: For the first three years of this decade, ending December 31, 2002, the S&P 500's average annual return has been minus 14.55 percent.

Bottom line: The stock market has always been volatile. That's what the past shows and what the future is likely to bring. But that's not bad news, it's just the reality. Use this information to benefit your investing habits.

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CORRECTION: Oops, my eyes deceived me. The real color of the Lipper Leaders check is orange and not red as I reported in last week's column.

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Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.