What Is the Average Stock Market Return?

A stock market return refers to the percentage increase or decrease in the value of investments in the stock market over a specific period. 

While this number can give you a general sense of how the stock market may perform over time, additional context is helpful for understanding what it means for your investments. 

First, keep in mind that the S&P 500 is a market index, not the stock market itself. It tracks the prices of the 500 largest U.S. companies, which make up 80% of the stock market’s total value. That’s why it’s considered a useful guide for tracking the performance of the stock market overall. 

Second, remember that the average stock market return is just that: an average of the market’s performance over many years. In any specific year, you’ll likely see a higher or lower return than the average. The value of your assets will also be impacted by inflation, the period of time your investment is in the stock market, and what assets you’ve invested in. 

It’s very difficult to predict exactly what your expected return will be in any given year. It’s even more difficult to predict the performance of a single investment. But if you’re investing for the long term, the average stock market rate of return can give you a sense of how you might expect your stock portfolio to perform over time. 

How are stock market returns measured?

Stock market indexes are commonly used to understand the stock market and its performance. In addition to the S&P 500, investors commonly look to the Dow Jones Industrial Average, which looks at 30 firms across industries, and the NASDAQ Composite, which looks at over 3,700 stocks listed on the NASDAQ exchanges, to judge market performance. These indexes reflect slightly different average rates of return because they each evaluate different collections of stock prices.

Average 5, 10, 20, and 30-year S&P 500 returns

If you look at the S&P 500’s historical annual returns by year, you’ll see that there’s quite a bit of variation from year to year. The last five years are a good example of why the average stock market return may not be a reliable indicator of market performance for any single year. For instance, 2022 brought a 19.44% decrease in performance, but 2021 saw a 26.89% increase. This is why the annualized return, which is the average return over a period of time, can be a more useful way to gain insight into the bigger picture of average stock market returns.

Factors that impact the stock market

Historically, the stock market has gone up in more years than it’s gone down. But the market’s performance is impacted by a number of factors in any given time period, including:

• Supply and demand
• The state of the economy 
• Inflation
• Interest rates
• Major world events like wars, unrest, and natural disasters
• Fluctuations in consumer spending

The stock market goes through a natural cycle of bear markets, which are market downturns, and bull markets, when returns tend to trend upward. Investors commonly watch these factors to recognize trends and attempt to predict potential market-wide performance. People might also watch these same factors on a micro level, focusing on how they may impact a particular business or sector they invest in. 

Average stock market returns and inflation

A 10% return on your investments won’t necessarily mean a 10% increase in the real-world value of your earnings. This is because inflation can cut into your money’s buying power. For example, the average inflation rate over the last 62 years was 3.8% per year. So, on average, an item that cost $100 in 1960 would cost about $1,004 in 2022.   

How does this apply to your investments? Say you invest $1,000, leave your money in the market for 10 years, and see a 10% rate of return on your investment; you would have earned $100 in returns. But depending on the inflation rate over those 10 years, your $100 may have less buying power when you sell your stocks than when you initially invested. It may be worth keeping in mind that the average stock market return tends to outpace inflation over time, which is one reason investors may see investing in the stock market as a hedge against inflation. 

The Bureau of Labor Statistics calculates inflation using the Consumer Price Index (CPI) by gathering spending data across a basket of commonly purchased goods and services. You can use a CPI Inflation Calculator to estimate the inflation rate over a specific period of time. 

Average stock market returns and market volatility

The stock market is volatile; stock prices are constantly rising and falling, sometimes dramatically. If you compare the market’s performance over two different periods of time, you’re likely to see that returns were impacted by what was happening in the world and the market during each period. 

In the last 30 years, for example, several events caused sharp changes in average market returns during specific eras, such as the “dot com bubble” burst in the 1990s, the “great recession” of 2007-2009, and COVID-19-related market upheaval in 2020. The overall stock market doesn’t need to experience a major crash or boom for volatility to impact the value of your assets.

What is a “good” stock market return?

What constitutes a “good” stock market rate of return depends on a variety of factors unique to each investor, including your financial goals, risk tolerance, and time horizon. For example, it’s common for younger investors to focus on securities that may have more risk in the short term but higher potential returns many years or decades down the road. On the other hand, investors who are closer to retirement may move money from more volatile assets to those with more overall stability, even if returns are lower. 

That said, many experts suggest that a 10% or higher rate of return is often considered “good” for stocks because it reflects or outpaces the average stock market return. After adjusting for inflation, a return of around 7% might be considered “good.”

For lower-risk investments, like government bonds, a return of 5% or higher might be considered a “good” return because investors see the benefits of stability as worth the trade-off for higher potential rewards. 

Maximizing returns with buy-and-hold investing

A buy-and-hold investing strategy is one way investors can take advantage of the stock market’s 10% average rate of return. This approach involves building a diverse portfolio and holding onto those investments for many years in order to ride out year-to-year market fluctuations.

Index funds can be a key component of this strategy, as they aim to mimic the performance of a broad market index. An index fund that tracks the S&P 500, for example, is likely to reflect the average stock market return reflected by that index.

Buy-and-hold investing also helps you take advantage of compounding. Compounding refers to multiplying your returns by continuously earning interest on the interest you’ve already earned. It’s another way to potentially magnify your earnings over time by simply leaving your money in the market. 

How to invest in the stock market

If you’re ready to start investing in stocks, the average stock market return is one concept that can help you understand the world of investing. You may also wish to familiarize yourself with other key stock market statistics as you build your knowledge. 

The good news is, you don’t have to become an overnight expert to dip your toes into investing. Stash’s emphasis on education empowers you to learn gradually, fostering financial confidence as you navigate your investing journey.

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