It might be true that ‘history repeats itself’, but in the stock market, what happened today may not happen tomorrow. Every day is a new one and how the market will react depends on a variety of reasons. This is why quite often, though the index might have gone up yesterday, assuming it will do so again today is a mistake. Market history can indeed lead investors astray. If you take a closer look at the investment disclosure statements, you will find that it is clearly mentioned that the past performance does not guarantee the same returns in the future.

About a year and a half back, often we used to hear that the average stock market returns have been more than 10%. However there were many who complained that they themselves never experienced these returns. The fact is, historical averages do often lead to wrong or biased expectations and perceptions and thus the investor can end up making an incorrect decision or conclusion. It is thus necessary to understand the stock market’s historical performance data and its role in the investment and financial decision making.

The stock market’s main index is guided by a small group of large companies where the trading volumes are very high. But consistently not just in the ASX, but in other markets too, small stocks have been outperforming these large ones for some time now. So it is necessary to find out which index is being referred to when the historical returns are stated, because this can obviously make a big difference.

Statistical calculations can also often be misinterpreted. In some cases the annual returns are adjusted for the inflation figures for the year to show the real figure, and in other cases, this is not done. Yes, the fact is, the annual average return can be calculated in different ways and some of them can be quite misleading. This is why it is never advisable to find out what the return is without going into the details.

Psychologists often use the term “hindsight bias” and this is very true in the context of the stock market. There are many investors who wrongfully assume that the market will perform the same way in the next week, month or quarter. About a year and a half back the stock market was booming, and the returns were fantastic – but it has to be understood that those were exceptional times. These surges are actually very rare.

The ASX has surged by 49% since March 2009 and this is quite extraordinary. The markets had gone down so much that this surge was expected when the economy began to perform better. However it might be a mistake to assume that the market will grow similarly in the next 6 months or so.

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