Why average stock market returns matter for your investments

If you’ve just started investing in stocks, you may be wondering what kind of returns you’ll see. While there’s a host of factors to consider, some investors use historical data on average stock market returns to help guide their investing strategy. Understanding average returns, as well as year-to-year volatility in those returns, can help you gain an awareness of the way the stock market functions.

What is an Average Stock Market Return?

When you invest in the stock market, you’ll get a return on that investment. A return on an investment is net gain or loss over a certain time period — it’s usually written as a percentage of the original amount invested. The stock market is highly volatile and while in some periods of time it may trend upward, in other times, it may trend down.

Return rates on investments can be measured over any period of time. The stock market is usually measured in terms of its average annual return, which is the standard amount the market would return in a given year. The average annual return for the stock market has hovered around 10% for the past century.

This doesn’t mean that you’ll see a 10% return every year — some years might have higher returns, while others could have a lower rate of return (or even a negative return rate). Since results vary significantly from year to year, it may be a good strategy to stay invested for long-term. Over the course of 5, 10, or even 50 years, the stock market may trend upward, potentially increasing your average return.

Here’s what those average annual returns looked like over the past three decades as of May 27, 2022:

Let’s assume you invested $100 in an S&P 500 index fund on September 28, 1992. On September 28, 2022 you would have $1,661 assuming you didn’t sell or take any withdrawals during that period of time and held your investment through the periods of volatility. Even if you account for inflation, your total return would still be more than 680%.

If you want to pick stocks but plan to invest with a long time horizon, Public’s Long-Term Portfolio feature can help you separate long term investments that you believe will perform well in the long haul.

Measuring Stock Market Returns

When investors refer to “average stock market returns” or the annual return rate of the market, they’re usually referring to the S&P 500. This index is considered the benchmark for annual returns in the U.S. stock market. Since it was first introduced in 1957, the S&P 500 index has had an annualized average return of 10% (10.7% if you’re being really precise).

This doesn’t mean that the market consistently returned 10% every year since inception. To understand the degree to which the market varies from year to year, check out the S&P 500’s annual returns over the following multi-year periods:

*Total returns over the period. These returns were calculated on September 18, 2022

Investing in the S&P 500

Since the S&P 500 is an index, it isn’t possible to invest in it directly. However, investors use a host of strategies to track the index’s performance

One common way is to invest in an index fund that tracks performance on an index. Index funds try to replicate the performance of a certain market index. The returns from an index fund should be similar to those on the index it’s tracking, but there’s no guarantee that it’ll perform well or match the index returns. And, of course, past performance isn’t a guarantee of future results

Some investors also choose to buy stocks that are in the S&P 500. The idea behind this strategy is that these individual stocks may have a similar average return as the index as a whole. However, the S&P 500 is an index of 500 companies, so the performance of a single company may or may not be equivalent to that of the index as a whole. For example, at the time of writing, Apple’s stock had increased around 2.4% over the past year. During that same period, the S&P 500 lost 12.8% of its value.

The most common investing strategy for achieving rates that may be consistent with the average annual return of the stock market is the buy-and-hold strategy. This strategy involves holding onto an index fund for a long period of time and is used by value investors like Warren Buffett. Some investors choose to pair this with a dollar-cost averaging approach, which involves investing the same amount in a stock at regular intervals. But once again, the 10% return rate is a historical annualized average and is not necessarily indicative of future results.

Historic Downturns and Returns

A major market downturn (also known as a crash) has occurred roughly once every decade since at least the 1980s. During a market downturn, your investments may lose a significant portion of their value. Therefore, it’s highly unlikely that you’ll see the average stock market return of 10%, or even a positive return at all.

Investors that used a buy-and-hold strategy were often able to ride out the downturns, and some ultimately were able to see a positive return. To understand how downturns can result in profits over the long term, consider these recent market downturns:

Black Monday (1987)

The Black Monday crash was the result of a strong bull market. Between 1982 and 1987, the Dow Jones Industrial Average (DJIA) rose from 776 to 2,722 — a massive increase that many economists believe was unsustainable in the long term. In one day, the DJIA fell more than 22%, its largest one-day decrease at that point.

However, the DJIA did eventually rebound and now sits at more than 30,000. If you had invested in Dow at the peak of the market in 1987, you would have seen a return of more than 1,000% over the past four decades provided you did not sell or taken a withdrawal during that period of time

Dot-Com Crash (2000)

The dot-com crash was the result of a stock market bubble caused by a rapid increase in internet-focused startups. Between 1995 and 2000, the Nasdaq Composite rose 400% to 5,048 in March 2000 before falling 79% by 2002.

Like the DJIA during Black Monday, the Nasdaq eventually rebounded and now sits at over 11,000. If you had invested in Nasdaq at the peak and weathered the dot-com crash, you would have seen a return of more than 110% over the past twenty years
* *provided you didn’t sell or taken a withdrawal during that period of time.

The Great Recession (2008)

The Great Recession was a massive decline in the stock market between 2007 and 2009. It was caused by a bust in the US housing market, which led to significant losses in mortgage-back securities and derivatives. By March 2009, the S&P 500 had decreased more than 50% from its 2007 high of 1,536.

Today, the S&P 500 sits at around 4,000. If you had invested in S&P 500 before the 2008 recession, you would have seen a return of more than 160% over the past decade and a half
**provided you didn’t sell or taken a withdrawal during that period of time..

Covid (2020)

The Covid-19 pandemic led to a series of rapid lockdowns around the globe. This, in turn, led to a sharp decline in the stock market. However, unlike previous examples, this downturn was less than two months long. Shortly after the earliest lockdowns eased up, the stock market quickly rebounded.

Factors That Affect Return Rates

Inflation

Returns over long periods need to be adjusted for inflation. Inflation is a broad increase in the price of goods and services, which reduces purchasing power. While inflation usually averages around 2% annually, over the course of several decades this can have a significant impact on your portfolio. This can be exacerbated by periods of high inflation, which hurt return rates.

For example, an investment in the S&P 500 may have generated a 259% return rate over the past 30 years. However, the inflation-adjusted return would be 178%.

Market Timing

When an investor chooses to enter the market can impact the average return rate. Investors that enter low and exit high will often experience higher average returns than those that enter the market during a downturn and sell off during a downturn. However, the market is highly unpredictable, which makes it hard to time your entry and exit times. If you still want to try your hand at timing the market, Public’s instant investing feature can help you invest rapidly at opportune moments.

Risk Tolerance

The risk tolerance of your portfolio will affect your return rate. Higher risk portfolios experience greater fluctuations in value, while lower risk portfolios may experience less market volatility. Investors who take on more risk should experience higher returns over time, though this is far from guaranteed.

Asset Allocation

The allocations of assets in your portfolio will affect its overall return rate. Some assets are inherently riskier than others, meaning that they can expect to experience higher returns as well as higher losses. Risky stocks, for example, have a higher risk level than bonds.

Predicting Future Returns

Since the stock market is inherently unpredictable, it isn’t possible to predict future returns. However, historically the stock market has increased more than it’s gone down over long periods of time.

Some investors try to time the market, but historical data shows that this approach rarely works in their favor. That’s because nobody knows when the market will move into a downturn or when it will increase. A popular alternative to timing the market used by some investors is the dollar-cost averaging approach. This strategy involves buying stock at regular intervals, which gives investors access to that stock at a variety of price points. Public’s recurring investing feature automatically invests a certain amount at a time you select, allowing you to take advantage of dollar-cost averaging.

Another strategy used by investors looking to match the average stock market return rate is the buy-and-hold approach. This strategy involves buying an index fund and holding it for a long period of time, with the goal of riding out market instability. Long-term investing can be taxing, both financially and emotionally. Luckily, Public’s social investment platform gives you access to a community of fellow investors who can offer support and encouragement along your journey.