What 20 Years of Average Stock Market Returns Reveals About Investing

Knowing how an average stock market return can impact your finances is part of successful long-term investing.
Last updated Dec 1, 2020 | By Miranda Marquit
Average Stock Market Returns

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When trying to decide how to grow your wealth, there’s a good chance you’ve looked at the stock market. After all, it’s considered one of the best ways to build wealth over time.

Looking at daily stock market performances, though, can sometimes cause stress. The idea of making money moves in a volatile market can be unsettling. However, rather than focusing on daily swings, it can make more sense to look at the average stock market return to get a feel for the long-term potential of your portfolio.

Let’s take a look at this concept, define what the average stock market return is, and look at what it tells us about what you might be able to expect from the stock market overall.

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What is the average stock market return?

As you learn how to invest money, the average stock market return is a term you’re likely to run into. In general, when analysts talk about the stock market and returns, they are generally referring to the S&P 500 index or the Dow Jones Industrial Average (DJIA), which is also an index. It’s important to understand, however, that average stock market returns can be based on different time periods, as well as on different indexes.

The S&P 500, which follows 500 large companies trading on the stock market, is often considered a measure of broad market performance. The DJIA, which consists of 30 of the largest companies trading on the market, is also often what people mean when they talk about the stock market. In reality, though, the stock market includes thousands of publicly-traded companies. But looking at a stock market index makes it possible to get a feel for how well stocks, in general, are doing.

One of the simplest ways to calculate a historical average when it comes to the stock market is to look at the return in a series of years and then divide it by the number of years you’re looking at. This can give you an annual return. But how do you do that?

As an example, we could start by looking at the returns for the DJIA for the past five years:

  • 22.34%
  • -5.63%%
  • 25.08%
  • 13.42%
  • -2.23%

As you can see, the percent of annual change to the DJIA varied widely over those five years. However, if we add up the numbers and divide them by five, we can get a simple average annual return of 10.60%.

An average stock market return isn’t about the short-term performance. Instead, it looks at the average to give you an idea of what you might see when the trendline is smoothed out over time. It paints a picture for people planning long-term investments.

The following table shows stock market returns by year for the past 20 years:

Year S&P 500 DJIA
2019 28.88% 22.34%
2018 -6.24% -5.63%
2017 19.42% 25.08%
2016 9.54% 13.42%
2015 -0.73% -2.23%
2014 11.39% 7.52%
2013 29.60% 25.50%
2012 13.41% 7.26%
2011 0.00% 5.53%
2010 12.78% 11.02%
2009 23.45% 18.82%
2008 -38.49% -33.84%
2007 3.53% 6.43%
2006 13.62% 16.29%
2005 3.00% -0.61%
2004 8.99% 3.15%
2003 26.38% 25.32%
2002 -23.37% -16.76%
2001 -13.04% -7.10%
2000 -10.14% -6.17%

The average stock market returns for the past 20 years

As you can see, some years come with negative returns. This is because it’s natural to have market downturns and for there to be losses in some years. When the stock market is doing well and is experiencing a series of positive returns, it’s called a bull market. On the other hand, when investors aren’t confident in the market and are selling off stocks and prices are dropping for a sustained period, it’s called a bear market.

It’s important to look at long-term results when planning your investment strategy, rather than responding to every movement of the market. Said another way, we want to examine macro trends versus getting too caught up in micro trends. When you look at a stock chart from day to day or even year to year, it can look as though there’s a lot of volatility. However, when you step back and look at the average stock market over a longer period, it looks less volatile and you can draw a smooth trendline.

Average stock market return over the past 10 years

Let’s look at the average stock market return for the last 10 years, ending on November 18, 2020:

  • DJIA: 10.29%
  • S&P 500: 11.57%

When put into context of total historical annual return, you can see that both the DJIA and the S&P 500 have performed better in this most recent 10-year period than when compared to their overall averages. For example, from 1896 to May 25, 2018, the annual average for the DJIA was 5.42%. If you look at the S&P 500 from its inception in 1926 through the end of 2018, the average return was about 10%.

The reason we often use 10% to express the average expected annual return of stocks is because the S&P 500 has historically averaged that. However, you can see that in the bull market following the stock crash of 2008, the average stock market return for both the DJIA and the S&P 500 has been higher than what we’d previously historically seen.

That said, past performance is never a guarantee of future returns and no matter the averages, investing in the stock market is alway a risk-taking venture.

Average stock market return over the past 20 years

We can also look at the longer-term outlook by adding up the annual returns from the years in the most recent 20-year period, ending on November 18, 2020:

  • DJIA: 6.23%
  • S&P 500: 6.67%

When looking at the past 20 years, though, the average stock market return isn’t as high, in part because it encompasses the aftermath of the dot-com bust of the early 2000s, as well as the Great Recession. The DJIA still outperformed its historical returns, though, whereas the S&P 500 didn’t.

Another consideration when looking at returns, and when considering your investment strategy and financial planning, is the fact that dividends can play a role in how much you end up with. For example, from 1930 to 2019, dividends accounted for 42% of the total returns of the S&P 500. What that tells us is that investing in dividend stocks or focusing on funds that pay dividends — and reinvesting those dividends — can help you boost your portfolio over time.

When you look at 30-year returns, though, you start to see a better effect, especially for the S&P 500. The average 30-year return on investments ending on November 18, 2020 for the S&P 500 is 10.11%.

What the past 20 years of stock market returns can tell us

When looking at portfolio growth over time, you can see that even though there might be some years with big drops (see the drop of more than 38% by the S&P 500 in 2008) things tend to smooth out over a long period. The longer you’re in the market, the more likely you are to see relatively stable ongoing returns and build your portfolio.

For many investors, a strategy that includes buying index funds and exchange-traded funds (ETFs) can make a lot of sense. Investing in an index fund or ETF that tracks a broad-based index like the S&P 500 can provide you with the ability to generally take advantage of long-term market performance.

When buying index funds and ETFs, it makes sense to look at expense ratios and other costs. Equity index funds charge, on average, about .07% in expense ratios, whereas equity index ETFs charge .18% on average. However, it’s not uncommon to see index ETFs with even lower expense ratios. Keep this in mind as a higher expense ratio will reduce your return.

Another consideration is that ETFs trade like stocks on the market, so you might see lower transaction costs. In fact, with some brokers reducing their transaction costs to $0 for stock trades, it’s possible to avoid transaction fees on index ETFs. Buying an index mutual fund might come with higher costs, though there are some brokers that offer their own index funds without transaction charges.

In the end, it’s important to compare your choices and figure out what works best for you. Fees can cut into your long-term returns, so keeping them as low as possible can make sense.

Special note: When your withdrawal impacts your personal return

It’s important to remember that past performance is no guarantee of future results. We can gain some context from looking at 20-year returns — or other average stock market return numbers — but that doesn’t mean that you’ll personally see consistent gains on any given year.

In fact, when you look at yearly returns, things start to look a lot different, and this can have a bigger impact when you’re trying to figure out when to liquidate some of your shares. At some point, you might need to sell shares in order to meet living costs or accomplish some other financial goal. In that case, the fact that the average stock market return is 10% each year may not feel as comforting because you’re forced to sell in a year like 2008 when you’re seeing a huge loss.

In general, it can often make sense to try to avoid selling in a down year if possible so you can avoid those losses. One way to do this is to use bucket strategy investing. With this method you keep a portion of your portfolio in cash. If you liquidate some of your shares when the market is high, and keep enough cash on hand for one or two years’ worth of expenses, you can reduce the chances of dipping into your portfolio in a year when it will result in losses. You can also get at least some return on your cash by keeping it in a high-yield savings account.

It’s vital to realize that when looking at the average stock market return, it’s different from your individual portfolio. Even if you use index products to try to keep your portfolio performance close to the average return, your personal portfolio is likely to still be a little off, and your overall returns will depend on when you as an individual end up buying and selling.

Bottom line

Although looking at the average stock market return can help you get a feel for what to expect and allow you to make plans for your portfolio, it’s important to consider that you still need to consider your own personal finance situation and figure out a plan that works for you.

A good rate of return depends on your investment timeline, goals, and risk tolerance. What’s good for you might be different than what’s good for someone else. Some people actively try to beat a benchmark performance, whereas others are more interested in simply tracking overall market performance as expressed by S&P 500 or DJIA returns.

Beginner investors might have the best experience by starting with a robo-advisor that can help them take advantage of index investments designed to help customers see performance in line with goals and long-term objectives. If you are overwhelmed by investing options, you might also consider speaking with a financial advisor.

In the end, most long-term investors are likely to grow their wealth more effectively by consistently investing over time versus trying to take a short-term approach to the market.

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