Ask Matt: Do stocks usually rise 20% in a year?

USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at [email protected].

Q: Do stocks usually rise 20% in a year?

A: Investors enjoying whopping gains in 2013 shouldn’t let a good year warp their view of reality.

Make no mistake, this has been an exceptional year for stock market returns. So far, the Standard & Poor’s 500 has rocketed 23.2% through October. That’s the market’s best run as of October in any year since 1997, when it was up 23.5%, says S&P.

Gains by stocks this year are well in excess of the S&P 500’s average annual gain of 9.7% since 1928, says Index Fund Advisors. That’s not to say the market can’t do better. For instance, the best year ever for the S&P 500 was in 1933 when stocks rocketed 46.6%, says Stock Trader’s Almanac.

Investors who examine the probability of the markets boil it down like this. The market’s long-term average return is 9.7%. But the stock market also has a standard deviation, a measure of risk, of 19.1 percentage points. In any given year, the market has a 68% chance of gaining 9.7% plus or minus the standard deviation of 19.1 percentage points. That means each year, there’s a pretty good shot (but not a guarantee), the stock market’s change will lie between a decline of 9.4% to a gain of 28.8%.

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There’s always the chance of a larger, or smaller gain. There’s a 15.8% chance each year, for instance, that the stock market will fall by more than 9.4% or gain by more than 28.8%. But those years are rare and most of the time returns are more subdued.

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