“What’s the average stock market return?” It’s a great question.
I’m going to use a variety of resources to give you the answer. But there’s usually a question behind this question. Can you think of it?
“What can I expect to make from the stock market over time?”
That’s usually the question that’s really being asked, and it’s actually quite a different question even though at first glance the two might seem so similar. And, you guessed it, both answers are quite different.
We’ll start with the first, more technical question. Then, we’ll move on to the practical question.
Buckle up. We have a lot of ground to cover.
What’s the Average Stock Market Return?
The average annual stock market return is widely reported to be 7%.
Trent Hamm at The Simple Dollar believes so. Tom DeGrace mentions the same figure. An article by J.D. Roth acknowledges a book that points to a similar figure. I’m sure I could go on and on.
Now, just because you see people writing that 7% is the number, that doesn’t mean that you have to immediately believe it. You can do your own research. For me, the fact that this number is continually coming up from what appear to be reputable sources gives me a great deal of confidence that the average annual stock market return is 7%. Plus, the data seems to prove this is the case.
There are those who believe that the number is different. Why is this?
It’s simply because they are using different measures (or standards) to answer the question. If you input a different timeframe, index, or add other factors to the equation such as inflation, the numbers may look different.
As an example, J.B. Maverick writes that the average annual return for the S&P 500 is approximately 10% (when measured from 1928 to 2014). He explains that this might lure investors into quite a disappointment when they don’t receive nearly that much in their portfolio.
But why? Why can’t people see that kind of a return?
Well, it’s possible they could, but it’s unlikely. There are a number of factors that make earning 10% or even 7% on average per year unlikely over a long period of time.
While the portfolio may yield 7% annually on average over time, there are factors that can reduce how much you actually keep. That brings me to the next question . . . .
What Can You Expect to Earn from the Stock Market?
If I had a dime for every time I’ve been asked this question!
Sometimes it comes in the form of the former question, but this is really the question that matters.
Below, I’m going to break down some of the factors that can work for and against your average annual return in the stock market. But first, I have to give you a word of caution . . . .
Don’t become discouraged! Whatever you do, don’t pull your investments out of the market simply because you think you won’t earn enough to reach your goals!
Sorry, did I yell? I didn’t mean to. It’s just important that you keep a balanced perspective. Never forget the power of compound interest and what it can do for your portfolio. Feel me?
Factors that Influence Your Return
Okay, let’s get to it. Here are just a few factors that can influence your average annual stock market return . . . .
1. Being stupid and investing for a short period of time simply for the gains.
If you’re going to invest in the stock market, and you want to make somewhere near the average annual stock market return, you wouldn’t be doing yourself any favors by investing for a short period of time.
“But Jeff, what if I make 20% in a year?”
Yeah, that’s possible. But you know what? That’s not a sound long-term plan. If you want to do things like save for retirement, put your kids through college, or simply build a lot of wealth, you’re going to need to have a long-term strategy.
Taking your money in and out of the market is what we call “timing the market.” Timing the market may yield some temporary results, but over the long-term it’s a no-win strategy.
Think long-term! Okay, I think you get the picture.
2. Having to take your money out of the market because you need the money.
Alright, this is one that you don’t have control over. If you need the money, and you don’t have any other options to fund whatever situation has arisen, then you have to take money out of the stock market. I get that.
Now, this can have profound effects on your rate of return over time. Say everything is going well, you’ve been investing for 20 or 30 years, and retirement hits and you need the money. But then, you realize, “Oh wait, there’s a housing crisis. The stock market stinks right now!”
Unfortunately, that’s just tough luck. Even though you might have had a solid return all those years, you might have to take a 20 or 30% portfolio loss simply because of the timing – or shall I say, bad timing?
This has happened to real retirees in recent history. It can happen to you, too.
This, my friends, is where a great financial advisor can help you out. If you’re in retirement and are invested solely into the stock market, you can do better.
For example, having some bonds in the mix may help you lower your volatility. There are also a number of other safe investments for those who are nearing or are in retirement. Granted, this strategy somewhat involves exiting the stock market, but it’s smart for your overall portfolio.
3. Fees.
I can’t tell you how many target-date funds I see that have mutual funds with ridiculous fees. Ugh.
Now, fees aren’t evil. People who work hard to create a mutual fund and the people who manage it deserve to be paid. But you know what? Sometimes, there are just better options out there (and there are).
It’s important to keep fees low because they do eat into your portfolio. Many times, these fees are recurring fees that pull money from your investments. And you know what? Many people don’t even know they are paying these fees unless they look at the fine print.
“But Jeff, if I don’t notice these fees, they can’t be that bad, right?”
Wrong. While fees might pull a small amount from your funds, they add up over time. You lose a lot of potential earning power when your money is drained through fees.
Hint: Index funds with low fees were a popular choice among experts.
Is There Any Hope?
Yes, there’s a lot of hope. Let’s summarize what you should do to raise your chances of a better return:
- Invest for the long-term
- Seek the help of a competent professional – especially if you’re nearing retirement or are in retirement
- Watch out for outrageous fund fees
While it’s true that you probably shouldn’t expect to receive the average stock market return, you can educate yourself and work hard toward that goal.
Final Tips
I’m going to ask you to forget the average stock market return. Why? If you keep this figure in mind, you might find yourself checking your portfolio every year, month, or day and expecting to see results that align with that number.
The truth of the matter is that the stock market fluctuates – a lot! One year it might be up 5%, the next year down 15%, the next year down 20%, then the next year up 17%. It’s pretty dramatic. Don’t get caught in the hype you’ll hear from the news stations about this or that regarding the stock market.
Remember, the historical average stock market return is one of the best educated guesses we have of what the market is likely to do in the future, but it is certainly not a direct correlation. Historical performance is not an indicator of future performance.
Crazy stuff happens, and the stock market will continue like a rollercoaster – it’ll go up and down and make your gut do a few flips every now and then. But that doesn’t mean you should bail on the ride (I’d recommend against that for obvious reasons).
Finally, keep in mind that while the stock market may produce the highest returns over time, you might want to consider some stock market alternatives. The stock market might not be for you. Talk with a financial planner and see what makes sense for your situation.
There you have it. The average stock market return. Was it higher or lower than you expected? What do you expect to earn in the stock market? Leave a comment!
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