It is difficult to know how much to invest in stocks or for how long you need to hold that investment. The truth is that, historically, the stock market averages around a 10% rate of return, not considering inflation. But what does that mean for you? And is this a rate you can count on? Here we’ll outline the details of the stock market rate of return, how it corresponds with inflation and how you can use the average rate of return to your advantage. Consider working with a financial advisor for advice on what to invest in and how long to hold each investment.
Stock Market Rate of Return Historically
First off, let’s clarify that when we’re talking about the stock market here, we’re specifically referring to the S&P 500. The S&P 500 is a stock market index that was started in 1926. It tracks the performance of the 500 largest publicly traded companies in the United States.
Since its founding, the S&P 500 has averaged right around 10% yearly return over time. However, this doesn’t mean that each year will match that. Remember, this is 10% yearly over time. So, a year like 2015, where the index saw a -2.97% slump, is counterbalanced by a year like 2021 where the market saw over 20% growth.
In fact, if you look at just the 10 years of 2012 – 2021, the market has had a +12.63% yearly change including dividends. That means that if in 2013, you put $1,000 into an index fund that tracks the stock market rate of return, you would have $4,252.31, assuming you reinvested all dividends. That’s a 260.3% return on investment.
Stock Market Rate of Return When Compared to Inflation
Inflation is a huge factor to consider when looking at stock market returns. While the Federal Reserve works to keep inflation ideally at 2%, that varies from year-to-year. For instance, the annual inflation rate in 2022 is forecasted to be around 8.2%. Since this is a down year for the market, with an average return rate of -16.15% through September 2022, inflation makes the loss harder. Not only did you lose money this year, but your money is worth less than it was in 2021.
However, when taking the average inflation from the 10 years of 2012 – 2021, you get 1.88% on average. So, that 12.63% rate of return turns into 10.75% more buying power on average per year when including inflation. Years like 2022 will raise the average, but even if you include it, the 11-year average of 2012-2022 is 2.08%–very close to the Fed’s mark.
With a 10% Rate of Return, When Will My Investment Double?
There’s a simple way to estimate how quickly your investment will double in the stock market: the rule of 72. With the rule of 72, you simply divide 72 by the annual rate of return and get the number of years it takes to double your investment.
72 / annual rate of return = years to double investment
So with our 10% rate of return, it will take 7.2 years to double the investment. Note: the effectiveness of the rule of 72 varies by how high or low the return rate is. Anything in the 6-10% range works well. But, as you go out of that range, it becomes less accurate.
The Average Stock Market Return Is Rarely Hit
When you look at the average stock market rate of return over the years, you’ll notice that individual years rarely fall in the average range. In fact, since the S&P 500 was started in 1926, only seven individual years fell in the 8-12% range. The stock market is a volatile place. Some years boom big, while others bust or fizzle out. What’s important is the average. The market average stays positive over time because several years have hit above 20%. While you may not know when a big year’s coming, the 10% rate of return average is something many investors have come to rely on.
How to Ride the Market Wave
There will be good years and there will be bad years for the stock market. Once you’ve accepted that you will win and lose, you can plan how you will operate. Here are a few tips on how to adjust your mindset during market changes.
- When the market’s up: You’re riding high and your portfolio value’s growing. Don’t expect it to last forever. What goes up must come down. You can use this time to make some trades. Just remember that the bull market doesn’t last forever.
- When the market’s down: As the saying goes, buy the dip. If the market’s slowing, now’s not the time to sell your assets. Stick to a diverse portfolio and try to snatch up some under-valued assets in the low market.
- Take advantage of the average: The only way you’re going to see the average stock market rate of return is by buying and holding assets for a long time. A buy-and-hold investment style invests in assets that will grow in value over time. This isn’t day trading — it’s holding an investment for 10, 20 or 30+ years.
- Rebalance your portfolio when needed: Occasionally you will need to rebalance your portfolio. This will allow you to align your assets to your goals and your risk appetite. A rebalance will make sure you have the right asset allocation to fit your needs.
The Bottom Line
The stock market rate of return averages 10% per year over time, but it rarely hits that every year. Some years go into the red, while others hit 20+%. Inflation factors in because it determines your buying power. Still, even with high years like 2022, the average inflation over time is around 2%. Those who benefit from the stock market average return are buy-and-hold investors who choose good-performing assets and/or invest in index funds that track the growth of the market. Long-held assets can take advantage of the compounding rate of return, growing wealth over time.
Tips for Investing
- Whether you’re new to investing or you know a few things, a financial advisor could help you create a financial plan for your needs and goals. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Learn how your money can grow over time with SmartAsset’s investment calculator. This helpful tool can let you plan out the future and predict a rate of return.
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