Over nearly the last century, the stock market’s average return is about 10% annually. That’s what long-term investors in the stock market can expect to earn if they buy and hold their investments over time.
Here’s what new investors starting today should know about stock market returns.
Stock market returns average 10%
The S&P 500 index comprises about 500 of America’s largest publicly traded companies and is considered the benchmark measure for annual returns. When investors say “the market,” they mean the S&P 500.
Measured by the S&P 500 index, stocks return an average of about 10% annually over time.
Keep in mind: The market’s long-term average of 10% is only the “headline” rate: You’ll lose purchasing power of 2% to 3% every year due to inflation, which puts the market’s average inflation-adjusted return at about 7% to 8% annually.
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The below table compares average annual stock market returns to current bond and online savings account rates, as of March 2019.
S&P 500 (including dividends) Average annual return: 10%
Value of $100 invested for 10 years: $260
10-year government treasury bonds
Current rate: 2.69%
Value of $100 invested for 10 years: $131
Online savings account
Current rate: 2.20%
Value of $100 invested for 10 years: $125
Keep in mind that the stock market is geared toward long-term investments — money you don’t need for at least five years. For shorter time frames, you’ll want to stick to lower-risk options — like that online savings account — and you’d expect to earn a lower return in exchange for that safety. Here’s our list of the best high-yield online savings accounts.
The 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.
But even when the market is volatile, returns tend 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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What to expect the stock market to return
There are no guarantees in the market, but this 10% average has held remarkably steady for a long time.
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.
Here are three key takeaways if you’re looking to make money in the stock 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.
3. You get the average return only if you buy and hold. If you trade in and out of the market frequently, 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 open a brokerage account, which allows you to buy and sell stock market investments. Here’s a step-by-step guide to opening a brokerage account, as well as our top picks for online brokers:
For more options, see our list of the best online brokers for 2019.