The stock market turned in a solid performance in 2017 — up more than 19%. It was one of the market’s better years. But not long into 2018, the market dropped nearly 4% on two separate days in the same week. Given these fluctuations, what level of returns should investors expect?
Over nearly the last century, the stock market’s average return is about 10% annually. That’s what long-term buy-and-hold investors can expect to earn over time. Here’s what new investors starting today should know about market returns.
Stock market returns average about 10%
A sense of reason might be the first casualty of a bull market. Investors get comfortable when stocks rise consistently. In a roaring market, stocks seem to go only up, up, up, and 30% returns appear perfectly normal. Everything you buy turns to gold — but then comes the crash.
Over time, stocks, as measured by the Standard & Poor’s 500 index, return about 10% annually. The index comprises America’s 500 largest publicly traded companies and is considered the benchmark measure for annual returns. When investors say “the market,” they mean the S&P 500.
Over time the market has gone up in about 70% of years.
Even if the market is volatile, it tends to be positive in a given year. Of course, it doesn’t rise every year, but over time the market has gone up in about 70% of years.
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But, the stock market’s returns aren’t always average
While 10% might be the average, the returns in any given year are far from average. In fact, between 1926 and 2014, returns were in that “average” band of 8% to 12% only six times. The rest of the time they were much lower or, usually, much higher. Volatility is the state of play in the stock market.
While 10% might be the average, the returns in any given year are far from average.
And if you don’t practice buy-and-hold investing? Don’t count on more than a 6% or 7% annual return. At best. In fact, many financial advisors play it conservatively and assume their clients will get this lower rate, rather than the market’s long-term average.
(The market’s long-term average of 10% is only the “headline” rate, though. You’ll lose purchasing power of 2% to 3% every year due to inflation, so your ability to buy more goods and services in the future grows closer to a 7% to 8% rate annually.)
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What to expect the stock market to return
So what kind of return can investors reasonably expect today from the stock market?
The answer to that depends a lot on what’s happened in the recent past. But here’s a simple rule of thumb: The higher the recent returns, the lower the future returns, and vice versa.
From the start of 2013 until the end of 2017, the S&P has returned an average of 13.4%.
That’s modestly higher than the long-term average of 10%, and since returns will average out over time, it’s reasonable to think that the next five years won’t be as good as the last. There are no guarantees in the market (especially in any given year), but this 10% average has held remarkably steady for a long time.
This knowledge offers three key takeaways if you’re looking to make money in the market.
1. Temper your enthusiasm during good times. Congratulations, you’re making money. However, when stocks are running high, remember that the future is likely to be less good than the past. It seems investors have to relearn this lesson during every bull market cycle.
2. Become more optimistic when things look bad. A down market should cause you to celebrate: You can buy stocks at attractive valuations and anticipate higher future returns, though everyone will say you’re crazy to buy when the market isn’t “safe.”
3. You get the average return only if you buy and hold. That 10% long-term average is good, but you’ll get near it only if you buy and hold. If you trade in and out of the market, you can expect to earn less, sometimes much less. Commissions and taxes eat up your returns, while poorly timed trades erode your bankroll. Study after study shows that it’s almost impossible for even the professionals to beat the market.
Over time even a few percentage points can make the difference between retiring with a tidy nest egg and continuing to drudge away in your golden years.
Ready to get started?
If the market’s long-term return sounds attractive to you, it’s easy to get started. You’ll first need to set up a brokerage account (here’s a step-by-step guide) and then you’re off and running.
Want some outside help? See our guide on how to choose a financial advisor, whether you want a low-cost robo-advisor or comprehensive financial planning.