What Is the Average Stock Market Return? | SoFi

As an investor, it’s important to understand average stock returns and what it can mean for long-term portfolio growth. In general, the average stock market return is about 10% per year, based on the S&P 500, but realistically, that number is more than 6% to 7% if you takes inflation into account.

It is rare that the average return of the stock market is actually 10% in any given year. Looking at nearly 100 years of data, from 1926 to 2021, the stock market’s average annual return was between 8% and 12% just eight times. in reality, stock market returns are often much higher or much lower.

Reading: What is the average stock market return over 30 years

There is a silver lining in this ongoing stock market drama. If someone loses thousands in the stock market, there is a chance that they will win them back over time. That’s why many experts recommend holding investments when the market experiences a bad week, rather than selling different stocks at a loss.

Sure, investing can be a long-term game. But how much can investors expect to earn in an average year or an average decade?

Many people want to know how much they can earn or lose before they retire. the amount they gain or lose over time is known as the stock market return and is an important factor for all investors in the stock market.

s&p 500 average return: 5 years, 10 years, 20 years, 30 years

Normally, people don’t invest in the stock market for just one year. Instead, they invest for the long term in the hope that the investments they buy today will be worth more years from now when they decide to sell. With that in mind, it may be more helpful to look at the average stock market performance over the past 10, 20, and 30 years to understand stock price movement.

by looking at the s&p 500 index, we can begin to get a sense of average market returns going back 5, 10, 20 and 30 years. Here’s what average stock market returns look like over the past three decades, according to calculations by moneychimp.

average market return for the last 5 years

based on s&p annual returns from 2017 to 2021, the average stock return over the past five years was 17.04% (13.64% when adjusted for inflation). that’s significantly above the typical average stock market return of 10%. this number may have been even higher had the market not been marked by pandemic-related volatility in early 2020.

average market return over the last 10 years

Looking at the s&p 500 from 2012 to 2021, the average return on the s&p 500 over the last 10 years is 14.83% (12.37% when adjusted for inflation), which is also above the average annual return of 10%. .

The stock market had its ups and downs throughout the decade, but the only years that saw losses were 2015 and 2018, and the losses were not significant: 0.73% and 6.24%, respectively.

average market return over the last 20 years

Looking at the s&p 500 index from 2002 to 2021, the average stock market return over the past 20 years is 8.91% (6.40% when adjusted for inflation).

The United States experienced some significant lows and notable highs during the early 2000s.

In early 2000, the market was doing exceptionally well, but from late 2000 to 2002, the dot-com bust contributed to losses for three years in a row. that period was not helped by the aftermath of September 11, 2001.

In 2008, the financial crisis caused huge losses. Looking at these factors, it’s not much of a surprise that the average 20-year stock market return is lower than the yearly average.

average market return over the last 30 years

When we add another decade to the mix, the average return gets a little closer to the 10% annual average. Looking at the S&P 500 for the years 1992 to 2021, the average stock market return over the past 30 years is 9.89% (7.31% when adjusted for inflation).

Part of this success can be attributed to the dotcom boom of the late 1990s (before the crash), which resulted in high rates of return for five years in a row.

what is a stock market return?

A stock market return is the profit, dividend, or both an investor receives on their investment. To understand stock market returns, it helps to know why the stock market fluctuates.

A company’s stock price can rise or fall based on a number of factors, including supply versus demand, market sentiment, changes in earnings, and political issues, among others. All of these factors can influence the average rate of return an investor earns on stocks.

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Seemingly unconnected financial factors, such as rising trade tariffs between two countries, can affect the valuation of certain stocks in a networked economy. Since the stock market is volatile, it is sometimes influenced by emerging global events and sudden changes in the prices of goods that are available to us, consumers and businesses.

Looking at a single stock, say an airline stock, as an example and then applying that knowledge to the broader stock market can help investors understand fluctuations.

Researchers, for example, have argued that the announcement of retaliatory tariffs on steel and aluminum imported from China into the United States led to a loss of $1.7 trillion in market value for publicly traded companies. . other economists have claimed that tariffs between us. uu. and China cost the average American household $374 over the course of a year. And when the WTO allowed us to impose tariffs on European-made aircraft, airline stocks took a plunge.

factors that impact the stock market

Numerous factors affect the value of stocks and the average return on stocks for investors.

to continue with the example of the airline, usa. The airline industry relies, in part, on the discretionary spending of leisure travelers: consumers who choose to pay for flights they don’t need to take. When trade wars lead to less money in the pockets of American consumers (i.e., certain taxed imports suddenly cost more), the market may react out of fear of future sales declines or concerns about rising cost. to do business. this is called market sentiment and can negatively affect the value of a stock.

when the us increased tariffs on Chinese metal imports, China reacted by imposing tariffs on the us. uu. exports the 2019 announcement of retaliatory tariffs by china on the us. uu. — which impacted U.S.-made products like home appliances, agriculture, construction equipment, textiles, and rubber — caused a $1 trillion one-day loss in global stock value.

Because the stock prices of several companies fluctuate simultaneously, the stock market as a whole can swing up or down. If a trade war affects the production of several companies abroad or the consumer’s ability to spend at home, the shares of many large companies could fall and the public could have doubts about the us. uu. economy. as a result, the market could fall. When tariffs on imports and exports are lowered, some stocks may rise as traders anticipate the reduced costs being passed on to consumers and businesses.

All this fluctuation affects the return of the stock market. When people wonder what their return will be, they ask how much they will have gained (or lost) in a year, or in 10, 20, or 30 years. Although everyone invests in different stocks and funds, an easy way to estimate how much they could earn is to look at the average return of the stock market.

measuring growth in the stock market

How do people measure the return of the stock market? looking at the indices. An index is a group of stocks that represents a section of the stock market, and there are approximately 5,000 indices that represent US stocks. Investors may be familiar with the three most popular market indices: the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500.

the s&p 500 index represents the 500 largest publicly traded companies, including microsoft, apple, amazon, facebook, and alphabet. It represents about 80% of the US stock market. So its performance is considered a good indicator of how the market is doing in general.

when people refer to the stock market and the average stock market return, they are probably referring to the s&p 500.

what is a good annual stock return?

When discussing the average rate of return on stocks and what you can expect, it’s important to be realistic. As mentioned, the average stock market return tends to hover around 10%, although when inflation is factored in, stock market returns tend to be closer to 6%.

Using the 6% figure as a benchmark, an investor could choose to build a portfolio designed to produce that level of return. If you’re invested in funds that track the S&P 500, you’re more likely to get stock market returns that fall within the average or typical range. anything above 6% could be considered icing on the cake.

If an investor is looking for above-average stock returns, they may choose to take a more aggressive approach to building a portfolio, looking to actively managed funds or momentum trading, for example, to try to capitalize on higher returns. potential. But those strategies can carry higher risk and, as always, there is no guarantee that an investor will beat the market. Additionally, active trading may mean paying higher expense fees or commissions, which may reduce investment returns.

Using a buy-and-hold strategy and continuing to invest when the market goes up or down can help an investor earn consistent returns over time. With dollar cost averaging, for example, one would continue to add money to the market regardless of how high or low stock prices are. In doing so, they could ride the waves of the market as stock market returns rise or fall, although they may not outperform the market in this way.

Taking this attitude can help an investor avoid falling into the trap of panic selling when market volatility strikes. This is important because exiting or entering the market at the wrong time could significantly affect a portfolio’s overall performance. profile.

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why the average return of the s&p 500 is not always average

The 10% annual average is not a reliable indicator of stock market returns for a specific year because outliers can skew the annual average. when the return is much higher or lower than usual in certain years, those years are known as outliers.

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for example, the average stock market return of the last 20 years may seem low, at 8.91%, compared to the return of the last 10 years, which was 14.83%. But not every year from 2000 to 2009 was bad for the stock market. in fact, in 2003, the average return was 26.38% and it was 23.45% in 2009, but there were negative outliers that affected the 20-year average.

dotcom bubble

Returns from 2000 to 2009 are perfect examples of outliers in the stock market. The late 1990s were the years of the dot-com bubble, when technology and website-based companies became popular in the market. In the year 2000, companies like Cisco and Dell placed huge “sell” orders on their stock, and investors began to panic sell their shares.

This period is often referred to as the dot-com crash and the market experienced annual losses for three years. in 2000, the average annual loss was 10.14%; in 2001, profitability fell by 13.04%; in 2002, they plummeted 23.37%.

2008 financial crisis

Another example of an outlier is the 2008 financial crisis. For years, banks had provided unconventional loans to people with low incomes and bad credit so they could buy homes. As more people bought houses, home prices increased dramatically. people could no longer afford their homes, putting lenders in a tough spot.

The Federal Reserve proposed a bank bailout bill, but Congress rejected the bill in September of that year, causing the market to crash. Congress passed the bill in October, but it couldn’t immediately undo the damage to the stock market. in 2008, the market return fell by 38.49%.

market recovery

The dotcom crash and the 2008 financial crisis are two excellent examples of outliers that have caused stock returns to fall more than usual. but in the years after these negative outliers, the stock market soared.

The panic caused by the dot-com crash and other stresses finally began to subside in late 2003, and the market returned 26.38% for the year. Average annual returns continued their upward trend for four more years, until the 2008 crisis.

After the market crashed in 2008, it rebounded with a return of 23.45% in 2009 and continued to rise for six years. the first loss was in 2015, and it was only 0.73%.

Sharp declines are often followed by strong gains and consecutive yearly gains, even if they are not huge. People who panicked and sold their shares in 2008 once share prices started to drop probably lost a lot of money. But those who kept their assets probably increased their profits in 2012, when market returns finally rose enough to offset how much the market lost in 2008.

When the stock market experiences a negative outlier, it may be useful to consider taking the long game into account.

stock market future growth predictions

As we can see from the outliers during the dotcom bust and financial crisis, when the stock market underperforms, it tends to recover eventually. Similarly, if the stock market performs exceptionally well, the market will eventually slow down and you will experience a loss. this can help level out the average return on the stock for investors.

The widely accepted rule is that if an investor’s rate of return is low now, he can expect it to be high in the future; if their rate of return is high now, they can expect it to be low in the future. historically, the market balances and experiences positive growth overall. stock market returns rise about 70% of the time.

When stock prices peak and then fall 10% or more, this is known as a stock market correction. If the market is performing like a charm, investors can bet that the market will correct itself by dipping.

All investments carry risk, so there is no way to guarantee a certain stock market return, let alone over a specific period of time. Many factors affect stock performance, so it can be difficult to accurately predict how a stock will perform. And anyone who tells investors they can time the stock market to maximize returns is dead wrong.

the takeaway

Although the average return of the stock market is 10% per year in the us. uu., that number has some caveats.

Realistically, that number is more than 6% to 7% when you factor in inflation. furthermore, very few years see a 10% stock market return; that number reflects an average, rather than a norm. some years are higher, some years are lower.

Some investors may enjoy following the ups and downs of the stock market. others may feel overwhelmed trying to make decisions when their stock is at an all-time high or in a tailspin. each investor has a different style. With sofi invest®, members can choose between active and automated investments to find the investment style that best suits their needs.

Active investing is for people who like a hands-on approach. they can monitor and trade their stocks online as they see fit. automated investing is for people who prefer a hands-off style. they can enter their goals in the sofi invest® app, and sofi takes care of the rest.

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Category: Stocks