What Is ACTUALLY The Average Stock Market Return?

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Do you want to know what is the actual average stock market return? We’ll go into it in detail here. 

You’ve been investing your money in the stock market for the last couple of years (months, weeks). You’re working hard to save for your retirement. 

How much money do you need in (early) retirement? You need to make all kinds of assumptions; how much money will you spend? How long do you need to get there? And what is the average stock market return?

Okay, so tell me, what IS the actual average return?

Why The ‘Average’ Stock Market Return Doesn’t Work

Economics is my passion and my first love. Why? Because some things seem so logical and then math shows up to the party. 

When you’re calculating the average stock market return, percentage returns aren’t reliably. 

Why tho?

Example: you have invested $1,000 in the stock market. 

Your first year, you lose 30% of your initial value. That hurts. You now have $700 in the stock market. 

Luckily, in your second year, you gain 30%. 

YEAHH, that means I’m back on track for the $1,000 right?

Well, almost. $700 + 30% return = $910.

To recap: when you lose 30% of the value, your stock goes from $1000 to $700. Over time you gain 30% of that value back, which means you still have a loss of $90.

When you have had a loss, it takes a larger percentage growth to return to your initial value.

That’s why it’s best to check an online calculator that takes the Compound Annual Growth Rate (CAGR) – my favorite resource for this is the MoneyChimp CAGR Calculator

That’s what we’ll be using for calculating the average stock market return over time.

What Is ACTUALLY The Average Stock Market Return
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What Is The Average Stock Market Return?

The average stock market return depends on the timeframe of the market, what you consider the stock market, and what assumptions you make. We will look at the S&P 500, which includes the biggest 500 companies from the US market. 

In short, the average stock market return is 7%. That is the simple answer. 

This has the following assumptions:

  • Reinvested dividends. Any dividends that your investments paid out will be reinvested in the stock market. 
  • Adjusted for inflation. The market return without inflation adjustment is 10% per year, most years it is adjusted for 2-3% inflation. 

There are several other factors that can influence your stock market return. Let’s be aware of them so you can maximize them to your advantage. 

Factors That Influence Your Stock Market Return

Here are many factors that influence your average annual stock market return. Let’s dive into them!

1. Your Investing Period

If you’re going to invest in the stock market, and you want to reach average returns, invest for the long term!

I would recommend an investing period of a minimum of 10 years.  The stock market is very volatile, some years you can have -10% returns and other years much larger than 7% returns. 

What if you make a great return these first few years? It’s up to you to decide if you want to sell or not. The problem is with having this strategy, you are trying to time the market – which is rarely a good idea. Warren Buffett agrees.  

With investing, you’re in it for the long term. You want to save for your retirement and want to build wealth. That’s unlikely to work when you keep buying and selling your stocks. 

When you’re investing for the long term, it doesn’t matter if the stock market is volatile for a relatively short period of time. Short term volatility has no effect on you.

2. Watch The Fees

Another important influence on your stock market return, are the fees. 

The majority of the mutual funds and other actively managed funds take a chunk out of your profits. Because the funds are actively managed, people are trading on a daily basis. These people get paid great salaries and that needs to come from somewhere. So they take that in fees. 

While fees are normal when you’re investing, some mutual funds can cost between 1-2% in fees. When you’re having a 7% average return, that is down to 5-6% depending on your fees. 

Many people don’t even know that they are paying fees. 

These fees add up over time. 

For example, you’re investing $1,000 per month, for 20 years. When you’re earning a 7% return, you will have $570,683 after 20 years. If you’re paying 2% in fees, you will earn $479,642. 

When you’re paying 2% in fees, you’re missing out on $91,041. 

That’s a LOT of money. 

Okay, I understand, so what can I do to avoid these fees?

Investing is something that is called an index fund or an ETF will drastically lower your fees. These are passively managed funds. All they do is track a specific index, like the S&P 500. 

Want to learn more about index funds and ETFs with low costs? Check out this article on low-cost index funds!

3. Don’t Forget To Diversify

When you’re checking the average stock market return, it is important to keep diversification in mind. 

When you decide to invest in an individual stock, the 7% average stock market return may be very far off. Your stock may highly overperform or underperform, depending entirely on the company. 

That means individual stocks are a LOT more volatile compared to an index fund that is spread out across all the companies in the market. 

If you want to make the average market return, diversification, and invest in something that is broad is important. 

Do you want to maximize return? See what’s the best to invest in Large Cap, Mid Cap, or Small Cap stocks.

So, What IS The Average Stock Market Return?

When we check the average stock market return, we will first focus on the S&P 500. 

Here are the numbers for 10-year periods in the history of the stock market:

PeriodReturn Return (Inflation-Adjusted)
1871-18819.97%13.03%
1881-18912.61%4.52%
1891-19018.42%8.84%
1901-19117.45%5.42%
1911-19213.46%-3.98%
1921-193114.24%16.39%
1931-19411.54%2.89%
1941-195113.37%7.06%
1951-196116.05%14.03%
1961-19718.24%5.15%
1971-19818.46%0.38%
1981-199113.99%9.10%
1991-200117.59%14.54%
2001-20111.42%-0.95%
2011-201913.35%11.37%

Stock Market Returns Aren’t Average

Even when we look at the average stock market returns over a period of 10 years, there is no real average that we can point out. 

Volatility is very real in the stock market, and you can see that in the table. 

You can see that there are a couple of periods with negative returns, however, they are few and the negative returns are minimal. In general, about 70% of the years the stock market goes up. 

My personal preference is: once I start investing in the stock market, I don’t want to sell in the near future. Depending on what retirement brings, I’d rather live off my dividends or other income-generating assets.

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What About The Average Return Of The Entire Market?

When we check two other large index funds, we can see what their average return is. 

We will look at the Vanguard Total Stock Market Index Fund Admiral (VTSAX), which is one of the most popular funds at the moment. The fund was created in 1992 and has the entire US equity market represented in the fund. The cost of the fund is just 0.04%. 

VTSAX returns 13.09% over a 10-year period and 6.83% since inception in 1992 (date of writing 2020). 

When we look at Schwab Total Stock Market Index Fund (SWTSX), we see a 13.02% return on a 10-year period and a 6.65% return since inception in 1999. 

The point is not to see which fund is performing better. The two funds have different starting dates, which can massively influence average return. Plus, recent volatility added to the mix makes for a more complicated comparison than this. 

Point is, the rate of return with recent volatility taken into account and the volatility in the late 1990s, the return is around 7% annual return. 

Volatility Is The Name Of The Game

When we look at the average return over time, you may think that the stock market will slightly increase every year. 

Hell no, the stock market is not having it. 

There are years where the stock market climbs 30%, which means there are also years when the stock market falls 20%. 

Markets are very volatile. That’s why it is important to not invest any money that you need in the upcoming 5-10 years. You don’t want to be forced to sell your stocks when the market is experiencing a dip. 

The general trend of the stock market over time is up. The way to get there is very bumpy though. 

What Is The Return Going Forward?

When you want to be financially free or go for early retirement, you want to take some kind of return into your calculations.

Well, as many people say, past performance is no indication of future results. We can rely on historical data but we will never be entirely sure what will happen in the future. 

In the 2000s people thought Tech companies would never go down, which resulted in the Dotcom bubble. In 2008 people were convinced real estate could never go down… Well, we all know how that turned out. 

That also means that you shouldn’t take the word of a market expert for the truth. A couple of days before Lehman Brothers went bankrupt, the analysts were still recommending people buy their stock. 

No one can look into the future and tell what is going to happen. Everything is based on assumptions and historical numbers. 

When we are looking at the upcoming years, there is one company that has presented a rather complete outlook. Vanguard, the company that started offering index funds, publishes a yearly annual report where they make an estimated guess on the economic growth. This is based on historical data and expertise. 

While they know as little as we do with regards to the future, their reports have been somewhat accurate over the years. Summarized, they predict 4.5-6.5% yearly growth for the next 10 years, before inflation adjustment. Which means 3-5% after adjustment for inflation. 

My Take On The Average Stock Market Return

While a 3-5% return on your investment will be lower than average, I don’t see 10 years as long term. The average will be the average in the long term (30+ years). 

When we look at the table above, you see that in 2001-2011 there was a period with -0.95% return on investment. It is okay to see returns below the average 7%, as long as we see returns above the average 7%. 

Plus, since the inception of the S&P 500, we only saw two 10-year periods with a loss. 

That means you never know when a downturn will happen and it would be very unwise to bet against the market. The general movement of the market over time is up. Going against the natural movement of something is rarely a good idea. 

Don’t Stress About The Average Stock Market Return

A couple of months ago (while we were in the COVID rollercoaster) I decided it was very unproductive to stress about money. 

Investing and the stock market is not something you have control over. You just have to enjoy the ride and trust that your money will grow an average of 7% throughout the years. 

Be sure to diversify your investments to spread the risk, so you don’t get sleepless nights. Low-cost index funds would be a GREAT way for diversification that I’m using myself. 

Just be sure that you are invested in the stock market. Even if it’s scary in the beginning. Even if you’re not sure where the market is going. And especially if you want to build your own money-making machine that grows your money for you. 

If you don’t invest, you’re sure to miss out on any gains. 

Focus on the things you can control:

  • Saving as much money as you comfortably can
  • Making more money with side hustles you enjoy
  • Investing the difference
  • While keeping a diversified portfolio

This is my tactic that I’m following for the last 1.5 years. It has resulted in me saving over half my income, investing over $40,000, and being on track to be financially independent at age 35. 

If you want to learn how to start investing right now, read the guide to investing your first dollar here

Yayyy that was it, damn I enjoyed writing this article. I LOVE diving into the numbers. 

Let me know, what is your experience with the average stock market return?

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