Average return in the US stock market

The long-run average

Over many decades, a broad basket of large US stocks, such as the S&P 500, has returned roughly 10% a year on average before inflation, with dividends reinvested. After inflation, that’s roughly 6–7% a year. The exact figure depends on the period you measure.

Yearly returns vary a lot

The average hides huge swings. In single years, US stocks have gained more than 30% and lost more than 30%. Typical results:

• Most years are positive, but a loss year is common, roughly one year in four.
• Large declines (bear markets) happen every several years.
• The longer the holding period, the narrower the range of average yearly returns.

That’s why stocks suit long time horizons. Money needed soon is exposed to a bad year.

Average return vs compound return

Two ways to describe returns over several years:

• Arithmetic average: add the yearly returns and divide by the number of years.
• Geometric (compound) average: the steady yearly rate that would turn your starting amount into your ending amount.

Example: +50% one year, then −50% the next. The arithmetic average is 0%, but $100 becomes $150 and then $75. The compound return is about −13.4% a year.

The compound return is what your wallet actually experiences, and it’s always lower than the arithmetic average when returns vary.

Keep in mind

• Fees, taxes and investor behavior (buying high, selling low) reduce what individual investors actually earn.
• Past returns don’t guarantee future returns.

This lesson is for education only and isn’t investment advice.

Next chapter: asset classes.