Stock Market Returns: When 10% a Year Ain’t 10% a Year

May 03, 2021

“How much return should I expect if I invest in stocks?”

A financial advisor might answer with brevity, “Ten percent.” Or she might give a more precise answer tagged to 1957 when the S&P 500 index began: “Well, over the long-term including dividends, investing entirely in stocks of the largest 500 companies in the US earns an annualized rate of about 10%."1

Even though this answer is technically correct, the problem is that sometimes the person walks away thinking that their annual statements are going to go up at a nice steady advance of 10% per year. Nothing could be further from the truth.

In fact, rarely does the annualized return of the S&P 500 ever hit 10%. On my count, according to the calculator on the source footnoted below, I’m only showing twice in sixty-four years: 1993 (10.17%) and 2004 (10.82%).

Routinely each year experienced much higher and much lower returns. Bad news first: it’s been negative fifteen times anywhere between -0.74% all the way down to -37.22%. Negative returns have even occurred three years in a row before (2000-2002). Now for the good news: it’s been positive forty-nine times and twenty-two of those times have been up 20% percent or more. The key point, as I’ve written before, is that volatility is the subscription price one pays for returns.

So, when you’re told that stocks might return 10 percent, you need to set your expectations properly. Recognize that there will be plenty of years of ouch!, meh, and yay! You can’t guarantee the future, but the pathway to 10% annualized returns in the past was only reached by rarely ever gaining that 10% in a single year.