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Understanding the Average Stock Market Return: Historic Overview

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Volatility in the stock market can make it difficult to know how your stocks will fare from one year to the next. But when it comes to long-term investing, understanding the average stock market return can help you plan your portfolio. The average stock market return tends to be around 10% every year but can vary depending on inflation. Returns aren’t always the same every year and can vary wildly in any direction. But where exactly does this 10% return come from? Here’s everything you need to know.

What Is a Stock Market Return?

Stock market returns are the profits — or losses — achieved through the trading of shares, along with the dividends that some companies give to shareholders each quarter. Dividends are portions of a company’s earnings distributed to shareholders; dividend amounts vary by share price.

  • The average stock market return– This is usually 10% before inflation. When adjusted for inflation, long-term returns average between 6% and 7%. However, most annual returns do not meet the average. Some years, the annual return is higher and some years it is lower.
  • The Stock Market can lose Money —  There are years in which the stock market loses money. The stock market experienced losses in 10 of the past 50 years or 20% of the time. These losses include five years in which returns ranged between 0% and 10%, two years in which the losses were between 10% and 20%, and three years in which losses topped 20%.
  • The takeaway: The stock market overperformed or underperformed far more frequently than it met the average. The good news is that the 10% average has not fluctuated much over the decades.

This is one reason why investors who use a buy and hold strategy should make money in the stock market over the long haul. Attempting to beat the market with frequent buying and selling will virtually guarantee subpar returns over time.

Factors That Impact the Stock Market

Despite the pandemic, the stock market did well in 2020, gaining 18.4%. Of course, various factors caused some stocks to soar and others to drop precipitously. The stocks of airlines, cruise lines, and the hospitality industry sank. Those of tech companies responding to pandemic consumer needs, such as Amazon and Netflix stocks, rose to new heights.

While the pandemic created a sudden and dramatic situation, many of the factors affecting stock prices in 2020 hold true in any year. Supply and demand is always a key economic indicator. More demand means stock prices head upward, while lack of demand sends them south.

Other factors impacting the stock market include:

  • Government or corporate performance data: Shares rise and fall on the announcement of the latest consumer price index, durable goods orders, home sales, retail sales, unemployment rates, the meeting minutes of the Federal Reserve, and other economic indicators.
  • Inflation: A rapid rise in inflation will likely result in higher interest rates. It also means investment returns are worthless.
  • Interest rates: Low-interest rates boost economic growth. Low rates mean that banks and bonds cannot offer much of a return, making investing in stocks more attractive. Higher rates can slow economic growth and make bank savings returns more competitive.
  • Investor confidence: Stock market returns rely heavily on investor psychology. When investors express optimism in good times, stocks surge higher. Lack of investor confidence can cause shares to plunge. Look at the downtimes as opportunities to buy quality companies at lower valuations.
  • Natural and manmade disasters: Calamities affect markets in that they cause both short-and-long-term economic damage.
  • Price to earnings ratio: The P/E ratio measures stock price as compared to earnings. A company with a high PE may mean an overvalued share price.
  • Stability: The stock market likes stability. War, political instability, and terrorist attacks can wreak havoc on stock market performance.

How to Measure Growth in the Stock Market

Growth

When measuring growth in the stock market, it is crucial to take a long view. People invest in the stock market to fund their retirement, their children’s education and their long-term financial well-being. That is why it’s necessary to look at stock market growth over the past few decades to get a true idea of the market rate of return.

The average stock market return is determined by looking at indexes, such as the S&P 500, the Nasdaq Composite and the Dow Jones Industrial Average. In general, the S&P 500 determines the average stock return as this index has the majority of publicly traded companies.

Historical stock market returns are the indexes past rate of return and performance. Financial analysts such as those who work for Morningstar or the Motley Fool use historical data to project future returns. This information is also used to determine what variables may influence future returns.

Measuring the Average Market Return for the Last 10, 20, and 30 Years

By looking at the average return of the market over the past decades, we can get a sense of how the market has performed. While we can’t predict the future, we can use historical market returns to get more information on how the markets might perform in the coming decades.

Period Annualized Return Annualized Real Return (inflation-adjusted)
10 years (2011-2020) 13.90% 11.95%
20 years (2001-2020) 7.45% 5.30%
30 years (1991-2020) 10.72% 8.29%

S&P 500 Average Returns 

For all intents and purposes, the average return on stocks refers to the S&P 500 average return. The S&P 500 Index comprises more than 500 of the largest publicly-traded companies in the U.S., making it an ideal benchmark. Companies are chosen for inclusion in this index based not only on size, but on liquidity and representation by industry group. Overall, the S&P 500 Index makes up about 75% of the entire stock market.

S&P 500 Average Returns 
S&P 500 Average Returns. Source: MacroTrends

Outliers in Stock Market Returns

Outliers are one of the reasons why an average market rate of return has little to do with how the stock market will behave. For example, in the run-up to the Great Recession of 2008, banks created and purchased high-risk, mortgage-backed securities and collateralized debt obligations. The collapse of the subprime mortgage market led to the demise of Wall Street giants such as Lehman Brothers and Bears Stearns.

In 2008, the stock market declined by 37%. The following year, the market increased by 26% and continued to rise significantly for the next few years. In about six years, the market reached all-time highs after the worst economic period since the Great Depression of the 1930s.

Other Leading Funds’ Historical Returns

The Dow Jones Industrial Average is among the best-known stock market indexes. Known simply as the Dow, it measures the price-weighted performance of 30 blue-chip U.S. companies. It serves to gauge the market’s daily return.

Here is the 10 year Dow average:

10 year Dow average
10 year Dow average. Source: MacroTrends

Future Stock Market Growth Predictions

Any investment advisory adds the cautionary note that past returns are not indicative of future performance. With that proviso, we can make some future stock market predictions. One thing is certain: the market will fluctuate. A roaring stock market does not last forever, but neither does a poor one. Eventually, the stock market will balance out.

Overall, the annual market rate of return should trend higher, as it does approximately 70% of the time. This is why a buy-and-hold strategy makes sense. The basic idea behind stock market investing success is buying low and selling high. Selling in a panic because of a downward turn means you end up buying high and selling low.

It’s not possible to predict the years in which the stock market will outperform and those in which its returns are substandard. The best way to protect your investment is by purchasing high-quality stocks and holding them for years. It is also wise to buy similar dollar amounts of stocks at regular intervals, a technique known as dollar-cost averaging which is also used in 401(k)s and other employer-sponsored retirement plans. Using the dollar-cost averaging method for your personal investing means your money buys more shares when the market is low and fewer shares when the market is high. As with the stock market itself, your purchase amounts will balance out over time.

Predicting which asset class will perform well in the future is also difficult. Trading Cryptocurrencies such as Bitcoin, which did not exist a decade ago, will likely play a role in future stock market returns. As with stocks, cryptocurrencies experience volatility. The growth of the cryptocurrency will likely only exacerbate stock market swings.

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