Investing > The Average Stock Market Return

The Average Stock Market Return

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For investors, there’s prosperous news and then there’s less-than-that news. The positive news is that in the last 100 years, the annual average stock market return has steadied at 10%. That’s before inflation.

With inflation, the so-so news is that “average” is not overwhelmingly the result when you look at the returns year-by-year. But also, inflation must be taken into account because each year, it adds up to a 2% to 3% deduction from the average annual return rate.

The best thing about it though is now that the more you know about the average return rate, the better your investment planning will be, now and in the future.

The S&P 500 Index is The Market

To investors, the S&P 500 Index is referred to as “the market.” Since the S&P 500 Index consists of 500 large publicly traded companies in the United States, it’s considered the trusted measurement of stock performance.

However, you might hear some investors say “the market” is the Dow Jones Industrial Average, or DJIA. Let’s review both indexes, and then you can form your own opinion.

Returns for The Dow Jones Industrial Average (DJIA)

Macrotrends Chart
This Macrotrends chart shows the rate of return for the years 1965 – 2018.

What’s missing from the DJIA are the dividends that should be included in the rate of the average stock market return. Because of this, the payouts are of less value. But we can look at the compounded annual growth rate per year for DJIA which is around 2%.

That rate is much lower than the S&P 500 Index by 8.28% and there’s a logical reason why this is the case. The S&P 500 Index comprises 500 companies while just 30 companies are included in the DJIA. What’s more, every company in the DJIA is also in the S&P 500 Index.

Returns for the S&P 500 Index

Warren Buffet compares the performance of Berkshire Hathaway to the S&P 500 Index over the period of years from 1965 through 2018 in his shareholder letters. From 1965 through 2018, the S&P 500 Index compounded annual gain is 9.7%. For the 2018 year-end, it’s 10% for the 10-year average return. The rate includes dividends.

Vanguard Flagship Fund

The benefit of the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is that for only an expense ratio of less than 4%, it includes a little bit of everything. The investor has a fund with value stocks and every size of cap growth. The whole equity market of the U.S. is represented in the VTSAX. It has been available since 1992.

Starting in November 2000, a 6.68% annual return rate minimum has been consistent for VTSAX. It continues to produce that rate today.

Furthermore, since March 2009, for a 10-year period, fund investors have enjoyed a 16.05% annual return. That’s impressive.

Fidelity Total Market Index Fund

When comparing VTSAX to the Fidelity Total Market Index Fund (FSKAX), it has been performing well too. An annual return rate of 7.29% has been the minimum return. However, for a 10-year period starting May 31, 2009, a 13.94% annual return rate for FSKAS has been realized.

The long-term annual return rate is what you want to look at due to market volatility and that’s at about 7% for both.

Volatility Makes Average Returns Uncommon

To best understand averages, it helps to look at the range of years being considered. For example, for an average return of 10% (to give some flexibility, we’ll say with a range of 8% – 12%), just six years had returned the average slightly higher or lower in the years between 1926 and 2014.

Although the majority of those years resulted in even higher returns, some were indeed lower. It’s worth noting that volatile markets show higher returns.

Invest, Save, Repeat

The stock market is suited best for investing for the long-term. For this reason, you’ll want to open an online saving account instead if you think you’ll need the money in five years or less.

When you’re new to investing, it’s also wise to try to limit your risk. Set a $500 limit and test the markets.

How to Make Realistic Expectations When Investing

While the average return of 10% has been unwavering lately, there’s no sure way to know how long that will continue. You can follow this basic rule: Look at recent returns and if they’re really high, they’ll be lower at some point in the future. Flip that rule around when you see lower returns.

That’s a general rule, not an absolute because the stock market goes up and down year by year. Base it on the average of 10% and then go with a 6% to 8% average return on your investment to buffer the risk somewhat.

Tips for Making Stock Market Money

1. Leave your excitement at the door.

Excellent job! You’re making stock market money.

Hold your horses there for a minute.

Remember the rule: When stocks go up, they’ll eventually go down… even if it’s a little bit. Bullish markets become bears at some point.

Watch and plan your strategy.

2. Bad economic times mean it’s time to get happy.

We’re not saying become cynical. You want feasting times to come back in style, but only after you’ve purchased the stocks you want at promising valuations when they’re low. Your goal is always to earn higher returns in the near future.

3. Resist the urge to frequently trade.

This one is tricky. When you trade often, you’ll spend a lot of time losing money. No matter how much experience you have, the more you trade, the more money you lose in taxes and commissions.

Trade yes, frequently, no. We’re talking doing what’s best for long-term investing. And for short-term investing, if you need it within five years, don’t buy stock.

4. Promise not to turn assumptions into unwavering facts for your retirement planning.

The best calculators for all-compassing retirement planning are the complex ones that require you to input a few ranges such as bank account savings as well as considers the stock market.

We’re referring to using tools for retirement planning, not solely investment planning tools. Even then, with the data you input, no one really knows with certainty what the returns will be over a range of time.

Preparing for Volatile Annual Returns

The DJIA and S&P 500 Index won’t bring about average single-digit returns. The extreme highs and lows occur in the double digits.

Be prepared for a rollercoaster ride. That’s why it’s best to invest what you won’t need for at least five years. Retirement investing requires a longer commitment, of course.

Economic Cycles Matter to a Certain Point

Before investing in foreign stock especially, research the global economic cycles of those countries first. Below is an insightful chart to review.

economic cycle chart-min
This chart provides comprehensive overview of global economic cycles within the world’s biggest economies.

Fidelity reported that China’s economy fared better in 2019 than it had previously. The country appears to be slowly coming out of its recession.

Reading economic cycle charts gives you that knowledge to invest based on economic facts. In a way, you have more of an edge.

Notice where the U.S stock market lands in the economic cycle on the chart. Since its midway down the economic growth curve, the returns will be lower than a few years ago.

It will take a while for the U.S. economy to slow down enough to reach the cycle’s end. After that, it will be on the upswing again.

Here’s the thing. No one can pinpoint when the cycle will reach its lowest point economically again. It could be two, five, ten, fifteen years or more.

Read the economic cycles, but don’t totally rely on them Why? Because unless we hit totally rock bottom like back in 2008-2009, there will always be companies beating the odds and surviving the downturns.

An Example of a Favorable Rate of Return

We talked about using online retirement planning tools earlier. Bankrate has a calculator tool. We used it to determine the figures in our example of how to reach your retirement plan investment financial goals.

AgePlan to Retire AgeFinancial Goal at RetirementMonthly InvestmentAnnual Rate of Return Required
2045$1.5 Million$1,00011.26%

You’ll need an 11.26% annual rate of return to have $1.5 million by age 45.

Try it. When using Bankrate’s investment calculator, move the slider on the “Rate of Return on Investment” line until you reach your retirement goal figure shown on the bar chart.

If you surpass the S&P 500 Index’s 10% average rate, you can say your return on your investment was pretty good.

Researching each stock option takes up a lot of time. If you want to get started right away but want to streamline your investment efforts, consider buying an Exchanged-Traded Fund (EFT), which contains a group of securities, or buy a mutual fund.

Make sure it uses the S&P 500 Index as a benchmark. The fund should mention it.

Why Investors Earn Less than Average Returns

According to Dalbar, Inc., in 2018, the average fund investor lost 9.42% while the S&P 500 Index went backward only 4.38%. The underperformance was due to bad timing.

It’s not an isolated issue. The average rate of return for the S&P 500 Index was 9.85% between the years 1995 and 2015. However, investors made 5.19% on their investments.

Common reasons why investors lose more often than they should is because:

1. They purchase stocks when prices are increasing.

Investors see a stock price go up, and then they get emotional. Their rationale behind their actions is that they believe if a stock price is rising, it must be continuing to rise and soon it will be worth more.

They want in on it before it reaches it becomes too expensive to buy. They believe at its highest price, the stock is at it’s fullest interest-making potential. Wrong. When prices rise, profits fall.

How to fix it: Wait and buy only when stock prices are low.

2. They take out money when stock prices go down.

When investors remove money during slow times, the money they’ve left on the table evaporated. When prices have lowered, it’s time to buy.

They missed an opportunity to earn when the stocks start to rise again. No one gets to use excess money that never materializes. Poof, vanished, just like that.

How to fix it: Leave funds in the brokerage account when the economy crawls. This was mentioned earlier, but it bears repeating.

Get it? Bears as in a slow bear market?

Having said that, investors are learning. Matter of fact, investor returns improved slightly in January 2019 and even upturned. The average investor enjoyed a return that fared better than the S&P 500 Index by 0.57%.

While that was certainly admirable, it didn’t cover the losses of 2018. Old habits are hard but not impossible to break if investors practice wiser moves more consistently.

The average stock return is the benchmark of your investment strategy. It makes the most difference in long-term retirement goal planning. Saving early is important if you want to earn the most.

It’s also vital to know how to handle your stocks in times of market volatility and calmness. Yes, you can earn interest confidently in both bullish and bear markets, so go ahead and start investing – but know that to beat the average stock market return you’ll have to make smart investing decisions.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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