{"id":235460,"date":"2018-03-08T11:15:01","date_gmt":"2018-03-08T19:15:01","guid":{"rendered":"http:\/\/getrichslowly.org\/?p=235460"},"modified":"2023-12-05T14:26:10","modified_gmt":"2023-12-05T21:26:10","slug":"stock-market-returns","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/stock-market-returns\/","title":{"rendered":"What is the average rate of return on stocks?"},"content":{"rendered":"
One of the fundamental ideas I try to promote here at Get Rich Slowly is your savings ought to be invested for long-term growth. You ought to use the magic of compounding to create a wealth snowball<\/a>.<\/p>\n Naturally, you want put your money into an investment that offers a reasonable return and acceptable risk. But which investment is best? I believe — as do most financial experts — that you’re most likely to achieve high returns by investing in the stock market<\/strong>.<\/p>\n But why<\/em> do so many people favor the stock market? How much does the stock market actually return? Is it really better than investing in real estate? Or Bitcoin? Let’s take a look.<\/p>\n In Stocks for the Long Run<\/em><\/a>, Jeremy Siegel analyzed the historical performance of several types of investments. Siegel\u2019s research showed that for the period between 1926 and 2006 (when he wrote the book):<\/p>\n My own calculations \u2014 and those of Consumer Reports<\/em> magazine \u2014 show that real estate does worse than gold over the long term. (I come up with a real return of just under one percent.) Yes, you can<\/em> make money with real estate investing<\/a>, but it’s far more complicated than just buying a home and expecting its value to soar. (It’s important to note that returns on real estate are a contentious subject. This recent academic paper analyzing the rate of return on “almost everything”<\/a> found that housing actually outperforms the stock market by a slight margin.)<\/p>\n Siegel found that stocks have been returning a long-term average of about seven percent for 200 years<\/em>. If Siegel’s findings aren’t unique. In fact, every book on investing<\/a> shows the same thing. Over the long term, the stock market produces an average annual return of about 10%.<\/strong><\/p>\n Note:<\/em><\/strong> As much as I love Dave Ramsey’s advice on getting out of debt, he’s notorious for providing misinformation on investment returns. He argues that you can expect to earn 12% in the stock market<\/a>. This makes a lot of people \u2014 including me \u2014 tense. You can’t count on earning a 12% return from stocks. You’re going to earn more like 7% after inflation, and I’d argue that in order to give yourself a margin of safety it’s better to assume 5% instead.<\/p><\/blockquote>\n Over the past 200 years, stocks have outperformed every other kind of investment. But before you rush out and sink your savings into the stock market, you need to understand a couple of things.<\/p>\n First up, it’s important to grasp that average market performance is not<\/em> normal<\/strong>.<\/p>\n In the short term, investment returns fluctuate. The price of a stock might be $90 per share one day and $85 per share the next. A week later, the price could vault to $120 per share. Bond prices fluctuate too, albeit more slowly. And yes, even the returns you earn on your savings account change with time.<\/p>\n Just a few years ago, high-interest savings accounts<\/a> yielded five percent annually in the U.S.; today, the best accounts yield about one percent.<\/p><\/blockquote>\n While it’s true that stocks average a 10% annual return, it’s rare that the stock market produces a return close to that average in any given year. Recent history is typical. The following table shows the annual return for the S&P 500<\/a> over the past twenty years (not including dividends):<\/p>\n <\/p>\n The S&P 500 earned an average annualized return of 7.19% for the twenty-year period ending in 2017. But in only one<\/em> of those twenty years (2004) were stock market returns anywhere near the average for the entire time span. (Note:<\/em> This twenty-year period has the lowest<\/em> rate of return on record for the S&P 500.)<\/p>\n Short-term market movements aren\u2019t an accurate indicator of long-term performance.<\/strong> (And make no mistake: One year is “short term” when it comes to investing.) What a stock or fund did last year doesn\u2019t tell you much about what it\u2019ll do during the next decade.<\/p>\n Because of their volatility, stocks outperform bonds<\/a> during only 60% of one-year periods. But over ten-year periods, that number jumps to 80%. And over thirty years, stocks almost always win.<\/p>\n The best way to build your wealth snowball<\/a> is to invest in the stock market.<\/strong> Doing so is likely to offer you the highest rate of return on your money. And the best way to approach stock-market investing is to take the long view. Forget about what the market does today or tomorrow. Focus on the future.<\/p>\n When I began to turn my financial life around, I made a habit of reading books about money<\/a>. The more I read, the clearer certain patterns became. I wrote about these patterns in my very first post about getting rich slowly.<\/p>\n I’ve continued to read personal finance books, including books about investing. And I’ve continued to detect recurring themes. One of the most prominent themes \u2014 present in most investing books and present in most conversations with real-life financial planners \u2014 is that, in the long term, stocks produce attractive returns. They may fluctuate in the short term, and may even decline by 50% in a single year, but historically, they yield an investment return of about 10%.<\/p>\n But I’m no financial expert. I’m just an average guy who is trying to build his wealth. Let’s see what the actual<\/i> experts have to say. In this post, I’ve included excerpts from four of my favorite books about investing.<\/p>\n From Yes, You Can…Achieve Financial Independence<\/a> (2004)<\/b><\/i> Had they had confidence in the long-term opportunities of the Dow and left their investment undisturbed for another 29 years (30 years total), it would have been worth $556,563. The original investment, which began with the worst one-year result, grew at an average annual compound rate of 14.34%<\/b> (the best 30-year result). As you can see, it is unwise to assume that short-term investment results are an accurate indication of long-term performance.<\/b><\/p><\/blockquote>\n The following charts indicate the probability of obtaining a certain return from a $10,000 one-time investment. The top line of each chart indicates the one-year probabilities. So, for example, there’s an 55% chance that the S&P 500 Index will produce a 10% return over a one-year period. There’s an 85% chance of obtaining that return over a decade. But, historically, there is a 100% chance of earning that return over a 30-year investment career. (Ignore “Fund A” \u2014 it’s irrelevant to this discussion.)<\/p>\n These next three charts provide snapshots of 1-year, 15-year, and 30-year investments from January 1897 to December 2003. The “individual periods” have quarterly start dates. Each chart breaks returns into quartiles. Watch how the numbers move to the middle \u2014 at about 10%.<\/p>\n <\/p>\n <\/p>\n From Saving and Investing<\/a> (2005)<\/i><\/b><\/span>How Much Does the Stock Market Grow Each Year?<\/span><\/h2>\n
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\nyou\u2019d purchased one dollar of stocks in 1802, it would have grown to more than $750,000 in 2006. If you\u2019d instead put a dollar into bonds, you\u2019d have just $1,083. And if you\u2019d put that money in gold? Well, it\u2019d be worth almost two bucks \u2014 after inflation.<\/p>\n<\/span>Average Is Not Normal<\/span><\/h2>\n
<\/span>Stocks for the Long Run<\/span><\/h2>\n
\nThis book by James Stowers contains some of the most complete information on investment returns that I’ve found. And Stowers presents it in interesting ways. Here’s what he says about comparing the short term to the long term:<\/p>\n[A $10,000] investment made on 01 July 1932 would have realized, one year later, the worst one-year result out of 425 [periods tested]: minus 69%. Most people, if they had experienced those poor results, would have assumed that this was an indication of future performance and would have become discouraged. Many would have traded their investment back for dollars and tried to find another place to invest their money.<\/p>\n
\nfrom Yes, You Can…Achieve Financial Independence<\/a> by James Stowers<\/i><\/div>\n
\nfrom Yes, You Can…Achieve Financial Independence<\/a> by James Stowers<\/i><\/div>\n
\nfrom Yes, You Can…Achieve Financial Independence<\/a> by James Stowers<\/i><\/div>\n
\nfrom Yes, You Can…Achieve Financial Independence<\/a> by James Stowers<\/i><\/div>\n
\nMichael Fischer’s slim volume remains one of the best and most under-rated finance books of the last few years. It’s a shame it doesn’t have a wider audience. Fortunately, Fischer’s Saving and Investing channel<\/a> on YouTube continues to grow. (1350+ subscribers now!) Here’s his take on the impact of time on investment returns:<\/p>\n