The Way Average Stock Market Investment Return Statistics Kinda Lie

December 11, 2023

“There are three kinds of lies: lies, damned lies, and statistics.”

One the slipperiest forms of statistics is that of averages.

For example, I could say that the Smith family has an average height of about 5’-6”, but that doesn’t necessarily tell you much, especially when you learn that one is a seven-footer and the other two are just five feet each.

There is a similar lesson with the stock market.

It may be true in principle that, as SoFi reports, the stock market return of the S&P 500 over the long term “is about 10% annually — and 6% to 7% when adjusted for inflation.”1

You may want to get more specific and detailed though, and you probably should given the quip: “Round numbers are always false”.

Investopedia gets more precise: 

The average annualized return since its inception in 1928 through Dec. 31, 2022, is 9.82%. The average annualized return since adopting 500 stocks into the index in 1957 through Dec. 31, 2022, is 10.15%.2

Specificity is not enough though because of the problem of an average family having a height of 5 foot 6 with a seven-footer in it. If you were making handcrafted sweaters for that family with only that information, you may be shocked when your handiwork doesn’t come close to fitting the tallest member of the family.

The numbers for annual stock market returns are all over the place year after year.

If a beginning investor wants to know the numbers a financial advisor is not lying when they give that average, but they may also not be helping them either. Because to the uniformed it’s very likely that if they invest based on that knowledge alone that they will expect each year to mosey along nicely at that pace.

That is unlikely.

There will likely be a few seven-footers to the upside and the downside and a whole bunch of other numbers not hitting the average.

Investors need to understand this.

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Sources: 

  1. What Is the Average Stock Market Return?
  2. S&P 500 Average Return