The average stock market is historically 10% annually before inflation. Stock market returns vary greatly, however. The average stock market return is about 10% per year for nearly the last century. The S&P 500 is often considered the benchmark measure for annual stock market returns. Though 10% is the average stock market return, returns in any year are far from average.
Here’s what new investors starting today should know about stock market returns.
The historical average stock market return is 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.
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 an online savings account — and you’d expect to earn a lower return in exchange for that safety.
The average stock market return isn’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.
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. Generally speaking, if you’re estimating how much your stock-market investment will return over time, we suggest using an average annual return of 6% and understanding that you’ll experience down years as well as up years. You can use NerdWallet’s investment calculator to see what 6% growth looks like based on how much you’re planning to invest.
Here are three key takeaways if you’re looking to make money in the stock market.
- 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.
- 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.
- 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.