What Is the Average Stock Market Return?
The average stock market return refers to what the stock market has returned historically over a specific period of time. According to Goldman Sachs Group Inc., the average annual U.S. stock market return has been 10% since 1960.
This may be surprising news if you catch daily headlines that report dramatic highs and lows in the market. However, the truth is that from one year to the next, returns rarely equal the historical average.
Even so, the historical average can be helpful when creating a sound financial plan for investing in the stock market. First, it’s important to understand more about stock market returns and how to calculate them.
What Is a Stock Market Return?
It’s important to determine stock returns before you decide where to invest your money in the stock market. Although all forms of investment come with a degree of risk, stocks are typically riskier than Treasury bonds and mutual funds.
The following factors affect stock returns:
- Corporate activity: Stock prices can fluctuate as a company shows signs of success or struggles.
- Demand: If more investors want a particular stock, it’s price increases.
- News headlines: Stocks can be sensitive to environmental and social situations.
- Political events: Trade wars can affect a company’s profitability, which then affects stock prices.
Some of these factors directly relate to the company’s performance. Others are completely out of the company’s control.
Historical Average Annual Return of Stock Market
Historically, the stock market has performed well, with overall gains outweighing the losses. This is why investing in the stock market is part of a long-term plan for most people.
The average closing price of the S&P increased over a 10-year period from 1,139.97 in 2010 to 3,099.89 as of Sept. 27, 2020. During that same period, the index decreased twice — in 2018 and 2015. It saw no change in 2011.
Due to factors such as below-average inflation and extremely low-interest rates, experts predict that average stock market returns will fall over the next 10 years from the current 10% historical average.
How To Calculate Rate of Return
Before you calculate the average stock market return, it helps to understand the term rate of return. ROR is the amount you gain or lose from an investment during a specific time period. The standard formula for rate of return is (Ending Value – Beginning Value) / Beginning Value) x 100. Here’s how to calculate rate of return:
- Identify the beginning and ending values of the investment.
- For example, the average closing price of the S&P in 2009 was 948.05. The average closing price in 2019 was 2,913.36.
- Subtract the beginning value of the assessment from the ending value of the investment.
- 2,913.36 – 948.05 = 1,965.31
- Divide the difference by the beginning value of the investment.
- 1,965.31 / 948.05 = 2.073
- Multiply the result by 100.
- 2.073 * 100 = 207.30
In this example, the rate of return is 207.30%.
How To Calculate Average Stock Market Return
The steps for calculating the annualized return are slightly different from the previous example. The formula is (Ending Value/Beginning Value) ^ (1/n) -1, with n equaling the number of years. Here’s how to calculate the average stock market return:
- Divide the ending value of the investment by the beginning value of the assessment.
- 2,913.36-948.05 = 1,965.31
- Divide the number of units by the number of years in the time period.
- 1 / 10 = 0.01
- Multiply the result of Step 1 by the result of Step 2.
- 1,965.31 / 0.01 = 19.65
- Subtract 1 to get the annualized rate of return.
- 19.65 -1.00 = 18.65
Best Practices for Stock Investing
People continue to invest in the stock market because they know they have a chance of making a profit. Yes, it’s risky. But every investment carries a degree of risk. You can reduce that risk by following a few best practices for investing. Here are some to consider.
Practice Dollar-Cost Averaging
The practice of consistently adding to your investment over time is dollar-cost averaging. An advantage of this practice is that you can buy more of an investment product when its price is low. The result is a greater return on your investments.
Invest for the Long Run
The value of stocks can go up and down, depending on factors such as economic and market conditions. However, holding on to a diversified portfolio of stocks can reduce your risk of losing your money.
Speak To a Financial Advisor for Specific Advice
Working with a financial advisor can be the best move you make when choosing how to invest your money. A professional who understands the nuances of the market can give you the advice you need to meet your financial goals.
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