Finding the average stock market return.
Articles, Investing Basics

What is the Average Stock Market Return?

I mean, this seems like a simple question, but there can be many different answers. Are we talking about an index or a single stock? During what time frame? Large cap or small cap? Let’s assume the purpose of this question is to give you a better understanding of the returns you can expect from the overall stock market. If this is our goal, then for simplicity let’s use the S&P 500 index. This index holds roughly 500 of the United States’ largest companies with in it. It is a market cap weighted index meaning that the larger the company, the more that company contributes to the overall performance of the index. Now let’s look at various time frames.

Timing Matters

There are a lot of fascinating ways to show the return of the S&P 500. The table below shows the S&P 500 compounded annual growth rate by decade.

*Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The “Thousands” were a particularly hard time for stock investors. The tech bubble was nearing its end in 2000 and the financial crisis of 2008 gave no relent to their returns. However, even in seemingly positive decades there have still been large corrections that could damage investor returns. This is particularly true if the start of the investing period came right before these corrections. Black Monday, October 18th, 1987, saw the S&P 500 fall over 20% in one day! Very few economic signals would have alerted you to the possibility that Black Monday was going to occur. Our Stock Bond Rotation Model was 100% invested in bonds during this time and survived with slightly positive returns. Nonetheless, an investor’s returns can certainly change depending on when they start and stop investing.

A more comprehensive look at the S&P 500 shows drastically different rates of return over even larger periods of time.

After the advent of the internet and the appeasement of the Cold War, the United States reaffirmed its status as a global superpower. Major technological innovations and a strong capitalistic society pushed the U.S. and its stock market faster and farther than ever before. These types of macroeconomic themes and trends dictate the long-term pace of an economy’s growth and therefor the growth of their stock market. Identifying and acting upon these themes can be great ways to use timing in your favor.

Summary

We believe that investing primarily in stocks requires a long-term mindset. With the S&P 500 as expensive as it is currently, we can expect that a portion of future returns have already been brought forward to the present. If you are wondering what future returns are going to look like, a good approach is to take these 5.75% and 8.82% historical figures and assume that over the long haul we are likely to be somewhere in between this range. If you plan to use these figures for retirement planning or any other financial planning venture, make sure to remain cautious and to not overestimate. Follow our models to help keep your investing simple. Still in need of a financial advisor or financial planner? Contact Us!

Investment Advisory Services offered through Financial Sense® Advisors, Inc., a Registered Investment Advisor. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. Both companies doing business as Financial Sense® Wealth Management.