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Сергей Мамаев

What is the average market return of the stock market and how to get it?

Since 1926, the average annual return on the stock market has been approximately 10%. For this reason, it is considered the benchmark for evaluating and targeting long-term equity investment performance.

Whether the 10% rule of thumb is a good yardstick for your own portfolio depends on many factors, including your risk tolerance, time horizon, and more.


What about the average stock market return?

The average stock market return for almost a century has been 10%. As a result, investors often use this as a rule of thumb to determine how much of their own investment could be in the future or how much they need to save to achieve an investment goal.


Where did this rule come from?

The 10% rule of thumb reflects the average annual historical return of the stock market, which is usually measured by the SP 500. This index tracks the performance of the 500 largest US companies in 11 sectors and reflects the state of the market as a whole. Since the SP 500 was not introduced until 1957, the Standard and Poor's 90 was previously used.


How to use average stock market returns

Since the 10% rule is based on decades of data, it includes many years when the stock market returned less than 10% (as well as many years when it returned more). This is why it should only be used for long-term planning purposes such as earning passive income or educating your child. With its help, you can predict how much initial and subsequent investments can be, as well as how much you need to save annually in order to accumulate the target amount.

But there are several factors that can affect your bottom line. Perhaps most important is your investment choice, which will be influenced by your time horizon and risk tolerance. Broker fees and taxes will also affect your average return, while inflation will lower your purchasing power and thus lower your effective return.


Time horizon

The stock market's average annual return of 10% is based on data over several decades, so if you plan on going into passive income in 20-30 years, this is a reasonable starting point.

But if your time horizon is much shorter - say, you retire in the next five years - you should adjust your expectations (and the asset allocation in your portfolio).

This is because short-term stock market returns rarely match long-term averages. For example, in 2008, due to the financial crisis, the SP 500 fell by 39%. The following year, it grew by 30%. In fact, if you had invested in the SP 500 for five years from early 2004 to 2008, your portfolio would have lost 2.26% year over year.

The 10% benchmark should not be used to meet more urgent financial goals with shorter time frames, such as saving for a car or vacation.

This is why the 10% rule of thumb does not work for shorter time horizons. If you will not be investing in the long term, it is better to choose less volatile (less prone to market fluctuations) and more conservative investments to ensure they are there when you need them, which usually means lower long-term #investments. return period.


Risk tolerance

While how long you invest affects the asset allocation of your portfolio, it also affects your risk tolerance or how well you can “handle” large gains and losses. This is because long-term benefits depend on staying in the market despite the ups and downs in the long run. In other words, don't overreact and sell when you are losing money and then try to come back in time.

“Buy and hold” in this context does not mean that you cannot reallocate your portfolio as needed. Rather, it means that you continue to invest in the market despite the ups and downs.

The higher your risk tolerance, the easier it will be for you to withstand sharp market fluctuations and resist the urge to sell. Reducing portfolio risk can be achieved by adding fixed income investments to your portfolio such as # bonds and bond funds, dollars, gold. But if you are adding fixed income investments to your portfolio, you need to lower your expectations of the expected return. For example, a “balanced” portfolio of 50% equity and 50% fixed income has had an average annual return of 8.3% since 1926


Market timing affects your bottom line

Your income depends on when you get into a stock or fund and how long you invest.

For example, let's say you are an aggressive investor with high risk tolerance.

Let's say you want to invest in a fund that tracks the MSCI Emerging Markets Index, which includes 27 large and medium-sized companies from 27 emerging markets. If the fund you participate in accurately reflects it, and you got into it in 2009, you would see an average annual return of 12.35% through 2020 (excluding management fees). But instead, let's say you invested in 2011. Then your average annual return would be less than half that figure at 5.07%.


Inflation eats up your profits

Inflation will affect the purchasing power of your income. Over time, what you can buy for 100 rubles will be less than today. For example, if you adjust a stock market return of 10% for an inflation rate of 3%, the real rate of return will actually be 7%.

It's also important to remember the old adage that past success does not guarantee future results.

A conservative approach may require higher premiums, but it can prevent shortages if the market does not match its past earnings.


Conclusions

  • The stock market has returned an average annual rate of 10% in almost 100 years
  • You can use this average to estimate how much to invest in stocks to meet long-term financial goals, as well as how much your current savings could add up to in the future.
  • Historical performance is just a starting point. You need to consider other factors, including your investment and your risk tolerance, the duration of your investment, inflation, and taxes.
  • Past performance does not guarantee future performance.