What is the Historical Average Stock Market Return?

People want to have a benchmark to compare their investment returns to on a yearly basis rather than looking at total returns.

At the same time, historical average returns may give people a general idea of what to expect in the long term.

In order to calculate the historical average stock market return, you must first define many factors.

For instance:

  • What do you consider the stock market?
  • How long of a period do you consider to be historical?
  • Do you include dividends in returns or only price appreciation?

Depending on how you decide to calculate your average stock market return numbers, your answers may be completely different than someone else’s.

That said:

While historical averages are important to give you an idea of what has happened in the past, past performance does not guarantee future results.

The future can be vastly different than the past, including stock market returns. This is especially true in the short term.

Here is a guide to help you understand past average annual returns.

As always, consult with a financial planner to understand how to apply these average returns to your specific situation. They can show you how past average returns can help you with your long-term goals and your financial plan.

What Is the Average Stock Market Return?

There are a few common indexes people consider to be the stock market. The major ones are:

  • Dow Jones Industrial Average: Tracks 30 large companies listed on U.S. stock exchanges
  • S&P 500: Tracks 500 large companies listed on U.S. stock exchanges
  • NASDAQ Composite Index: Tracks more than 3,300 companies and securities traded on the NASDAQ stock market -- with a focus on information technology companies

Depending on which source you read, you may find different returns for these different indexes.

Here’s a look at the 1-, 5-, 10- and 15-year returns of the DJIA, S&P500 and NASDAQ Composite Index with an end date of September 19, 2019. This annualized return data was found on Morningstar.

Average Stock Market Returns

Market index DJIA S&P 500 NASDAQ Composite
1-year return 2.61% 3.40% 2.94%
15-year average 9.41% 8.37% 12.31%
10-year average 10.68% 10.90% 14.39%
15-year average 6.67% 6.75% 10.19%

As you can see, there are many average returns that vary dramatically depending on the index and time period you look at.

When you look at the outlier years, the actual returns you could get are even more dramatic. Here are the biggest annual drops and gains for each index according to Macrotrends’ data.

Biggest Gains and Losses in Stock Market History

Market index DJIA S&P 500 NASDAQ Composite
Biggest calendar-year return 81.49% (1915) 46.59% (1933)* 85.59% (1999)
Biggest calendar-year drop -52.67% (1931) -47.07% (1931)* -40.54% (2008)

*S&P 500 did not exist in its current form in 1931 or 1933.

Average stock market returns are useful to get an idea of what you might be able to expect, but it’s just an idea. Don’t get attached to the returns numbers.

Instead:

Monitor your investments and make decisions to alter your strategy based on the returns you actually get.

Market indices change

Sometimes, indexes change how they’re made up over their lifetime. 

For instance, the S&P 500 started with a different name and as a 90 company index. It didn’t become a 500 company index until the 1950s.

However, people want to compare longer periods so sometimes they include the 90 company index along with the 500 company index.

Other factors

Some return numbers decide to reinvest any dividends the stocks paid out back into the index. This can inflate the returns versus not doing so. 

If you reinvest your dividends, it’s okay to use the higher numbers. That said, you still have to pay taxes on dividends in many cases. This usually isn’t taken into account in these calculations.

As you can see, figuring out the exact average stock market returns is near impossible. There are too many variables to give a single number.

Some websites have given exact numbers though.

Zacks says that the average DJIA return from 1896 is 5.42%. Investopedia says the S&P 500’s return since 1957, when it became a 500 company index, is 7.96% through 2018. 

Ultimately, these numbers don’t matter.

Why?

Things have changed significantly since 1896 and 1957. Instead of trying to compare lifetime returns of these indexes, it’s often more useful to look at more recent data.

How to Attempt to Earn the Average Stock Market Return Using Index Funds

If you want to attempt to earn the average stock market return going forward, there’s a relatively easy way to do it:

Invest in index funds or index ETFs.

Index funds and index ETFs aim to track a particular index.

For instance, VFINX is Vanguard’s S&P 500 index fund. Its goal is to earn the same returns as the S&P 500 index by investing in the same exact companies. Vanguard also offers an S&P 500 index ETF (VOO).

There are plenty of index mutual funds and ETFs for many different types of indexes.

Unfortunately, they rarely produce the same exact returns as the indexes they follow.

Vanguard allows you to compare the returns of VOO to the S&P 500 on their website. For the 10 year period ending August 30, 2019, the results show VOO slightly lagged the S&P 500’s returns. 

An initial $10,000 investment in VOO would have ended up as $32,240.82 while the same investment in the S&P 500 would have ended up as $35,307.68. 

Why Actual Returns May Vary

So why do the returns of the index funds differ from the indexes these funds aim to track?

There are many potential reasons.

Accuracy of tracking indices

First, indexes rarely match up exactly with the index funds or ETFs that try to track them. 

The weighting of the different companies within an index can change daily.

While index managers try to keep up with changes, they can’t exactly replicate the index at every second of every day. This results in slightly different returns.

Fund management fees

Managing an index fund or index ETF has costs, too.

While many index-based investments have very low costs and low expense ratios, these costs do add up over time.

The index, on the other hand, is a theoretical representation and doesn’t include these management costs. That means returns will differ.

Taxes

Your returns are going to be different because you may have to pay taxes when you buy and sell investments, too.

You may have to pay taxes on dividends and other distributions from funds, as well. These taxes eat into your returns over time.

Tips to Attempt to Earn the Average Stock Market Return

If you want to attempt to earn the average stock market return when you invest in the stock market, there are a few things you can do to get as close as possible.

Look at the long term

First, invest with a long term mentality.

If you want average returns, you need to be invested for a significant amount of time. Average returns don’t happen every year.

Instead, they come from a mixture of big gains, big losses, small gains and small losses combined over a long time.

Use a tax-deferred account

You’ll likely want to consider using tax-advantaged accounts when you’re investing for retirement. 

In particular, Roth retirement accounts can help reduce the impact of taxes on your returns.

You don’t have to pay taxes or penalties on withdrawals after reaching age 59 and ½ as long as your Roth IRA is at least five years old. This tax benefit can make a big difference over decades. 

Avoid timing the market

Next, don’t try to time the market.

It may seem easy when looking at past bull markets and bear markets. Unfortunately, it’s much more difficult because you can’t predict the future. 

When you attempt to time the market you have to make multiple correct decisions to do it successfully. 

You have to buy at the right time the first time. Then, you have to sell at the right time. Finally, you have to decide when to reinvest at the right time, too. If you miss any of these three events, your returns can quickly start lagging the market as a whole.

If you know you have a hard time staying invested when markets tank, consider revising your asset allocation to something more conservative.

A more conservative mix may drop less in times of turmoil and help you stay invested.

Seek an advisor

Another option to avoid selling during market drops is hiring an advisor (or using robo-advisory services) to guide you through these drops. 

A good advisor can more than make up for their fees if they help you stay invested and stick to your plan.

Just be aware of how they make money and that their fee is reasonable before signing up.

Stay diversified

Finally, you may realize the average stock market returns aren’t what you should be going after.

While it’s a nice benchmark to compare your returns to, having a diversified portfolio is likely a better option

Stocks are only one of the many types of investments you can choose. You can mix stocks with bonds, real estate, commodities and other asset classes to help balance your portfolio to weather both good and bad times.

Do What’s Right for You

Historical returns are a nice way to get an idea of what to expect in the future, but it’s just an idea.

Future returns aren’t predictable or guaranteed when you invest in stocks.

When making a financial plan, it often makes sense to work with a professional such as a fee-only financial advisor. They can help you understand the nuances of the average annual returns of the stock market. 

Financial planners can also help you figure out how you can use that data to reach your financial goals based on your specific situation.

Ultimately, you need to invest in a way that helps you achieve your goals. Most often, that means making long-term investments.

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