Putting your hard earned money into the stock markets is one of the most popular means of growing wealth. For good reason. According to investment bank Goldman Sachs, stock market returns over each decade have averaged 9.2% over the past 140 years. While that may read like sound figure, that percentage is affected by inflation. Investors can expect to lose 2% to 3% in purchasing power annually due to inflation.
That said, the S&P 500 has fared even better between 2010 and 2020. Goldman Sachs notes that the S&P 500 has given an annual average return of 13.6% in the past 10 years.
The S&P 500 is one of the commonly followed equity indices in the world and a barometer for the overall US stock market performance. The popular stock market index tracks the performance of 500 large companies (which periodically change) listed on stock exchanges in the United States. New retail investors must note that there are thousands more stocks trading on U.S. stock exchanges. Even though, by value, the S&P 500 makes up about 80% of the entire stock market.
Despite the decades long strong returns, there is a catch. Even seasoned investors cannot predict which years will be above or below the average returns.
Take for example the period of 2010 to 2020. Six of those ten years resulted in outcomes that were very different from the annualized average return of 13.6% from that decade. Of those six different years, three generated significantly lower returns, while three years delivered higher returns; 2013 and 2019 generated the highest returns, more than 30%.
The way these numbers are calculated are also not representative of common investing habits. It has to be stated that the rate of returns are calculated based on data from the beginning of the year compared to the end of the year. But the typical investors doesn't buy on the first of the year and sell on the last day.
Investing in the stock market should be geared towards long-term investments — money you don't need for at least five years. There are also different avenues for investing in equities. People may choose to buy shares of individual companies on the S&P 500 or stocks outside of it. Some opt for mutual funds. Such funds or investments have their own average annual return, which may not be the same as the S&P 500's return.
There are no guarantees in the stock market, but the near 10% average has held remarkably steady for a long time. As for the answer to the question what kind of return can investors reasonably expect from the stock market? The answer 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.
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