Over the last century, the average stock market return in the U.S. has been around 10%. Investors often use this number to forecast potential long-term returns and to decide how much they need to save to reach their investment goals.
While 10% is the long-term market average, this doesn’t mean you should expect to see a similar return on your investments each year. When looking at short-term returns (year-to-year), the market averages can vary greatly.
For instance, the average return in 2021 was 26.89%. In 2018, the market saw an average return of -6.2%. If you go back to the financial crisis in 2008, the average return took a dive to -38.5%.
Historical average stock market return (S&P 500 for 5,10 & 20 years)
When people talk about the stock market, they usually mean the biggest publicly traded companies in the U.S. The index that tracks the 500 largest U.S. stocks is called the S&P 500, and it includes companies across 11 sectors, including energy, healthcare, and information technology. When researchers estimate total stock market returns, they usually mean the returns on the S&P 500.
Historically, the S&P 500 produces annual returns of around 10%. However, this number is closer to 6% or 7% when you account for the effects of inflation. If you’re trying to determine how much you can expect to make over the next 20 or 30 years, you might use the 10% market return as a reasonable estimate. However, you shouldn’t use the average 10% return if you’re trying to estimate short-term financial goals.
Sometimes it can take years, if not decades, for the stock market to stabilize. For example, investors who put all of their money into the stock market in 1929, right before the crash, had to wait over a decade before the market recovered and returned to the same level.
Even averages over the last five, 10, and 20 years show a great deal of variance.
- Average 5-year return: The average return for the S&P 500 over the last five years (2017 to 2021) is 17% and 13.6% when adjusted for inflation.
- Average 10-year return: The average return over the last ten years (2012 to 2021) is 14.8% and the average return is 12.4% when adjusted for inflation.
- Average 20-year return: The average return over the last twenty years (2002 to 2021) is 8.9% and 6.40% when adjusted for inflation.
What affects the stock market
The market responds to a number of influences that affect the rise and fall of stock prices. Some of the major influences include:
- World events and the news: Any major world event including a global pandemic, a war, or a natural disaster can impact the stock market. In general, negative news (e.g. political or economic uncertainty) negatively affects the stock market. On the other hand, positive news like a breakthrough drug or technology can prompt people to buy a stock or a sector, causing prices to rise.
- Political events: A political event like a presidential election or a war can affect the price of stocks. Political instability typically results in a decline in stock prices.
- Inflation: Periods of high inflation often result in lower returns in the stock market. This is because higher inflation typically leads to higher interest rates and lower economic growth. Periods of high inflation also lead to increased uncertainty on the part of investors, which can also lead to slower economic growth.
- Rising interest rates: Increasing interest rates make it more expensive to borrow money which can lead to lower investment. When interest rates are low, stocks are an attractive investment choice. As interest rates rise, investors often turn to bonds to get the best yield on their investment.
Why the S&P 500 average return isn’t always average
Due to market volatility, you can’t count on an annual average return of 10% from the S&P 500. Life is too unpredictable. However, if you are invested for the long haul, say 20, 30, or 40 years, you’re more likely to see your investments hit the average return.
While a year-to-year market chart looks like a heart rate monitor, a long-term chart of the stock market shows a consistent upward trend. Sure, there are years where you’ll see a significant dip or rise but, over time the trend line continues to rise.
Buy-and-hold investing
The unpredictability of the stock market year over year is why buy-and-hold investing is the strategy chosen by those who want to try and limit their risk. Buy-and-hold investing is a passive investment strategy where an investor purchases stocks or other securities and stays invested for the long term, usually a decade or more.
In the short term, the stock market can look volatile. Watching your investments rise and fall can be a stressful experience. However, if you adopt a buy-and-hold approach, you don’t have to pay attention to the short-term fluctuations.
With a buy-and-hold strategy, you spend time on the front end deciding how to set up your portfolio to best meet your time horizon and risk tolerance. After the initial setup, you leave your investments to grow, checking in periodically and rebalancing when needed. Over time, the value of your portfolio should continue to rise.
Those that are willing to take on more risk for the possibility of higher rewards may prefer an active trading approach. Active trading is an investment strategy where the investors engage in frequent buying and selling of stocks with the goal of outperforming the market. While it’s possible to find success with active trading, it requires a great deal of time and knowledge and is generally viewed as a riskier strategy.
Pros and cons of buy-and-hold investing
There are benefits and drawbacks associated with buy-and-hold investing. It’s up to you to decide which investment strategy best suits your risk tolerance, time horizon, and overall knowledge of the market.
Pros of buy-and-hold investing
- Simplicity: The buy-and-hold approach takes less time and effort than an active approach. Simply set it, and (mostly) forget it. Active investing requires constant research, monitoring, and trading.
- Capital gains: Buy-and-hold investing avoids capital gains taxes, which are levied when you sell a stock for more than you paid for it. With a passive approach, you limit the number of sales and therefore the amount of capital gains taxes. What’s more, long-term capital gains (gains on assets held longer than a year) are taxed at a lower rate than short-term gains and at a rate quite a bit below income taxes.
- Fees: Though most brokerages have lowered or eliminated fees, you can still reduce your returns If you’re paying an advisor to actively manage your investments, or you are invested in actively managed funds.
Cons of buy-and-hold investing
- Investor emotions: Investing is emotional. If you see your portfolio suffer major losses when the market starts to nosedive, you might be tempted to sell. The buy-and-hold strategy requires strong investor resolve. Sometimes staying the course is easier said than done.
- Tied up cash: With a buy-and-hold approach, your money is tied up for the long run. This means you might not have cash available for other opportunities.
- Risk: Like any investing approach, buy-and-hold comes with a certain amount of risk. You are not guaranteed an average return of 10% just because you wait for ten, 20, or 30 years.
How can you achieve average stock market returns?
Just as no one can predict the future, no one can predict exactly what the stock market is going to do. There is always a certain amount of risk when it comes to investing. However, if you want to take measures to reduce your risk while also trying to achieve the average stock market return, a buy-and-hold strategy is a good approach.