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What Do Average Stock Market Returns Really Look Like

I’ve been investing since 1999 and worked as an analyst for venture capital firms until just a few years ago…and I’ve never seen a stock market as excited as it is right now.

Nobody has seen a market like this and that’s what makes it so dangerous.

The longest bull market in history is about to stretch into its 11th year and many investors have never even experienced the panic of a full-blown crash. What does that do to expectations and investing behavior? What are some of the risks you need to avoid when planning your investments and a reasonable return?

Let’s compare the recent bull market return with the longer-term average, how that affects investor decisions, and what you might expect going forward.

Longest Bull Market in History has Spoiled Investors

The stock market has gone up pretty much without pause for more than a decade. The annualized return on stocks in the S&P 500 has been 15% over nearly 11 years, way above the long-term average of 8% over the last 30 years.

In fact, except for a scare in late 2018 and a few hiccups here and there, looking at the rise in stock prices is something like trying to take in Mount Everest…it just keeps going higher.

I’m not about to complain about the great returns or the money I’ve made. I am saying this is far from the average stock market return and that’s dangerous for a couple of reasons.

First is because investors get used to easy money and think 15% is the norm. They rationalize that if 15% is the average they can get on stocks, why not go for 20% on penny stocks or that 30% return promised to them in a spam email?

These kinds of skewed expectations of a reasonable return will get investors into trouble.

Another reason why that long trend of returns is dangerous is because investors have now baked it into their calculations for saving. If you can get a 15% return annually for the next 30 years, there’s no need to save as much as possible. Your nest egg will grow on even the smallest amount.

That means many investors aren’t saving as much as they need. When the real long-term average return shows up over those 30 years, they’ll be badly behind on their retirement plan.

So let’s look at what the real stock market average looks like and what you can expect.

What do Stock Market Returns Look Like?

Market data from Invesco going back to 1956 shows the average bull market produces a 153% return and lasts 55 months. That translates to a 22% annual return, which is higher than the current bull market annual return but in a much shorter period.

Take the longer-view though, adding a bear market which tends to last 12 months and knock 34% off of stock prices, and the stock market generally produces a 9.6% annual return through a bull and bear market.

That sub-10% annual return is well under what we’ve seen in the last 11 years but it’s still a great return compared to other investments. Investment-grade bonds have returned just 4.2% over the last 15 years and real estate funds have returned 8.4% over the period.

But even those average annual returns may be too high if you’re planning on how much to invest.

Is the Stock Market Party Over?

Stocks are now trading for 18.6 times the earnings analysts expect to be reported over the next 12 months. That’s 24% higher than the average PE ratio when measured over the last decade.

What does that mean for investors?

It means you might not get those average market returns if you’re just getting started. Stocks are already expensive on a historical basis. That means prices need to come down to be a good deal or they’ll have to drive further into nosebleed territory just to eke out average returns.

Investment manager Black Rock is forecasting annual returns of just 5.2% for U.S. stocks over the next 10 years. Don’t think you’ll get much reprieve in bonds either, the forecast for fixed income is for a 1.8% annual return over the period.

That’s not to say that stocks can’t keep surprising investors as they have over the past several years. Stock prices could keep marching higher despite warning signs and high valuations but there’s also a very real possibility they go the other way for less-than-average returns.

To be on the safe side, investors should use these lower returns as a guide when planning their investments.

  • Plan on investing enough so even the lower annual return in the range of 5% to 8% will get you to your goal.
  • Hold a mix of stocks, bonds, and real estate to protect yourself from an eventual recession and stock crash.
  • Consider a side hustle income to make up for lower returns with increased income and investing.

Lower stock market returns aren’t the end of the world and maybe investors should have expected the good times wouldn’t last forever. Make sure your expectations for stock returns are grounded in reality and you’re planning matches up.

Ajeet Sharma, the founder of Financegab and a well-known name in the field of financial blogging. Blogging since 2017, he has the expertise and excellent knowledge about personal finance. Financegab is all about personal finance which aims to create awareness among people about personal finance and help them to make smart, well-informed financial decisions.


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