The stock market's as strong as it's ever been, but there's a catch

Do you feel like stocks just aren't dishing out the same sort of net gains they did in the past? It's not a completely crazy conclusion to come to. Things haven't seemed the same since the 2000's dot-com meltdown. Even looking past all the extreme volatility in the meantime, long-term returns have felt subpar for a while now.

The fact is, however, the S&P 500 index is just as fruitful as it's ever been, logging average annual gains of just a little less than 10% when not adding any dividend payments to the equation. Factoring in its dividends pumps the typical yearly return up to a little more than 11%.

But, there's a catch. Unlike most of the time prior to 2000, now you need 20-year holding periods to ensure you're achieving the sorts of reliable returns you'd expect -- and need -- from the stock market. An investing time frame of five years, or even ten years, may not suffice.

Yes, times have changed

There was a time when mutual funds' and brokerage firms' marketing materials touted how there had never been a 10-year period since The Great Depression when the market had lost ground. And to its credit, the S&P 500's rolling 10-year-return track record is still respectable. Even with the subprime mortgage crisis of 2008, coming so soon after the dot-com implosion just eight years earlier, the claim still stands.

There's an alarming "just barely" aspect to the data, though, perhaps giving pause to investors already worried the modern-day market isn't as rewarding as the stock market of yesteryear.

The graphic below tells the tale, comparing the S&P 500's average annual gains (or losses) for rolling five-year, 10-year, 20-year, and 30-year time frames going all the way back to 1956. The five-year and 10-year rolling average gains are plotted with pale dots, since they're not the focal point of this analysis. Do note, however, that both have been near, at, or even a little below zero more than once since the mid-1950s.

To be fair, it's not as if the 20-year and 30-year rolling average annual returns have always been spectacular. The 20-year figure fell to single-digit levels in the 1970s and lingered there for years. The same 20-year average gain wasn't exactly impressive, either, at less than 10% just a few years ago.

Still, even these below-average market returns beat any alternatives during this time, in addition to outpacing inflation.

So, if you're looking to build long-term wealth, stocks remain the best bet. Investors just need to embrace long-term thinking by incorporating 20-year investing time frames, rather than five-year or even 10-year time frames. The latter periods of prolonged weakness could readily wreck retirement plans.

Rethinking how you pick stocks

But what does this mean in practical, actionable terms?

First and foremost, it means we all need to make a point of thinking about the longevity of companies' business models; will there be more demand for this product or service a couple decades from now?

A name like cable television outfit Charter Communications comes to mind. Certainly, the world will still be watching television in the future. But will consumers finally demand a la carte programming they buy and stream directly from a studio then, bypassing cable companies altogether?

At the other end of the spectrum, there's little doubt we'll all still be carrying around some sort of connected mobile device come 2044.

Company-specific resiliency is also something to consider.

Take Johnson & Johnson and General Electric as examples of what not to do. Thirty years ago, both organizations appeared to be at the top of their respective games. The world needed industrial goods and healthcare supplies, and these two stalwart names had a strong track record of delivering.

In retrospect, though, it was even clear then (to those who dug deep enough and were intellectually honest with themselves) that both companies were more often than not just buying bolt-on revenue rather than innovating and evolving. In this vein, debilitating debt itself has proven catastrophic to more than a few once-great names like Toys R Us, Bed Bath & Beyond, and Valeant Pharmaceuticals (now, for the most part, Bausch).

It would also be amiss to not point out that some companies are synonymous with their founder CEOs, for better and for worse. Amazon has continued to do well since Andy Jassy took the helm from Jeff Bezos back in 2021, but it's difficult to say some of the Bezos magic hasn't been lost. Ditto for Apple, which hasn't been quite the same since the late Steve Jobs stepped down as CEO back in 2011.

That's not to say stocks of companies with high-profile chief executives aren't investable. They're often very investment-worthy, in fact, even if not permanently so. It's simply to suggest figuring out beforehand if it's the company itself or its leader that makes its stock worth holding on to.

It also wouldn't be wrong to own a few more dividend-paying names and fewer hot growth stocks, collecting sure-thing cash now instead of hoping for a bigger payoff later. After all, when those dividends are reinvested, the net returns on the right dividend stocks can rival those of some popular growth stocks.

Fun fact: Data from mutual fund company Hartford indicates that since 1960, 85% of the S&P 500's net returns is attributable to reinvested dividends paid by its constituent companies.

Welcome to the new norm

With the exception of the post-war 1960s, this isn't the way things used to be. The market used to be less volatile and more consistent when it came to logging gains, or at least curbing losses. Something appears to have changed in the late 1990s. It was most likely the advent of the internet, and subsequently the introduction of low-cost online stock trading. Since then, we've seen more extreme movement from the market, both bullish and bearish.

Regardless of the reason, this is the hand investors are being dealt, so this is the hand investors must play. Investors should worry less about predicting a stock's future price and think more about the underlying company's long-term growth prospects. More to the point, all investors should be looking for companies that they can truly hold for a lifetime, even more so than we have in the past. After all, it could take an entire generation's worth of time for a stock to fully and fairly reward shareholders.

The good news is, in many ways, this is actually an easier and less time-consuming approach to picking stocks than the performance-chasing one too many investors are utilizing now.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Apple. The Motley Fool recommends Bausch Health Companies and Johnson & Johnson. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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