No. Sorry to burst your bubble, but anyone who guarantees that your average stock market return will be 8% is lying to you. Even most of the experts touting that figure are merely repeating the claim made by other experts. Except that it’s not the whole story.

The Average Stock Market Return Depends on the Period
A few years ago, a magazine (probably Money) demonstrated that you can make the average stock market return be any number you want, depending on the period you choose. You could choose a decade with an average 20% return, which would certainly prove that the market is a winner. Some people say 8% since World War II. Many cite 1926-2000. Other cite 1980-2007.

The Average Return Depends on the Stocks
In addition to the chosen period determining the average return, so do the stocks chosen. Some experts cite the S&P 500, others look to the total US market, some include international stocks, too. Whatever number you want, you can find some segment of the market to provide it.

According to Money, the Vanguard Total Stock Market Fund returned 3.5% for the last ten years. The S&P 500 index returned 2.9%, or zero after inflation.

The Average Return Isn’t Based on Real Investments
Of course, all of these averages are determined by computer models. You’d have to hold each stock in the chosen category with equal weight, no expenses, and for the exact same period. No buying or selling in between. Real people can’t possibly hope to achieve that. Partly because most people who could have started investing in 1926 are dead. Many of the people who could have started investing immediately after World War II are now drawing down their investments.

The Average Return May or May Not Include Expenses
Some experts tally the return with expenses, but most don’t, for the simple reason that computer-based charts don’t have any. Plus, how do you decide what those expenses are? If you look at one mutual fund for a specific period, then you can calculate that, but if you look at the stock market from 1926-2000, it can’t be done. Broker fees vary, as will your returns once expenses are factored in.

The Market Moves in Cycles and You May Not Hit the Right One
Finally, and this is the real kicker, the market moves in large cycles. You may have a couple high-flying years, followed by a few negative years, with a few middling years mixed in. If you were to buy in during the high-flying years, and then have to retire during a major negative turn, you’d wind up with pretty poor returns. Many people who retired in 2000 found themselves with dismal savings despite having million dollar portfolios just a year or two earlier.

So What Should You Do?
The first thing you should do is recognize that experts can cite all the statistics they want, but no one can promise you that you’ll see the same return. Usually, that statement is followed by the one that “past performance doesn’t predict future performance.”

The second thing you should do is invest anyway. Even the most paltry portfolio should at least keep pace with inflation, which is more than a savings account can do. You should also diversify your portfolio with international investments, real estate, bonds, and several classes of U.S. equities. That will help shield you from wild swings in any one segment. Although the major global markets are increasingly moving together, certain elements (like stocks and bonds) do still move opposite each other.

When planning for the future, I envision a 4% average stock market return. If I get to 8%, that’s fantastic, but I’m not going to count on that. I’d rather be conservative in my estimate and then be pleasantly surprised. I’m sure my future heirs won’t mind a slightly larger inheritance either.


44 Responses to “Can I Expect My Average Stock Market Return to Be 8%?”

  1. BW on September 1st, 2008 5:57 pm

    The equity premium is around 5.5% according to this paper:
    So it definitely makes sense to expect less than 8%.

  2. Anonymous on July 2nd, 2009 1:15 am

    From what I’ve heard, Warren Buffet was only pushing 18% per year at his best so I think for a more average investor 10% would be the maximum and 13% would be for more “skilled” traders.

  3. Jeff Raines on September 11th, 2009 8:17 pm

    I’m afraid this article and the comments are quite discouraging to most investors. 13% is for skilled traders? Nonsense. It’s very easy to acheive returns of more than 10% by simply investing in a couple of conservative mutual funds– and staying put. In fact, I would say you’d have to be brain dead to earn less than that.

  4. Richard on September 13th, 2009 2:15 pm

    Money Managers like Warren Buffet will have return up to 25% annually, however, most of them will promise returns of about 10 to 15 percent depending on the economy. This is because Money Managers invest billions of dollar, and liquidity of their assets makes it hard for them to trade (called the discount to volume). Thus buying equities at this level will result in changes in the market’s supply and demand. The same happens when wall street firms start a major sell off. These fund managers will take advantage of major economic cycles and fundamental analysis to generate their returns. A good fund manager will have better returns than the market itself. However, its impossible to generate huge returns if the market itself does not move. When huge moves on the market occurs, that’s when money managers have the potential of making some profit. Now, investors that deal with small amounts of money are incredibly profitable; generating returns of hundreds, if not into the thousands of percents annually. Because they are able to buy and sell as they please, these investor can take advantages of a few percentage points as well as buy into small cap companies and penny stocks. But be careful, most of them have sophisticated software and are very experienced in the field of making easy money from people that do not know how to invest.

  5. investment on September 18th, 2009 10:59 am

    Well, that’s right. No one can guarantee us that we will get 8% return. I too invest in stock market and I understand that the average rate of return depends on many things such as the period, the stock itself and other such factors. Even a decent 4% return on my investment for a short time is fine.

  6. Lee Todd on September 19th, 2009 2:08 pm

    The only people who make money in the stock market are the brokers. The transaction costs negate the profit of external investors, except in very RARE cases, during very RARE time periods. The Great Depression taught my grandmother to put her savings into 3-month, federally insured CDs, and she’s still got her money. Don’t be a SUCKER!

  7. karl on November 9th, 2009 2:39 pm

    what is ‘Jeff Raines on September 11th’ smoking? a brain dead investor buys indexed funds or ETFs, and if you invested 10 years ago, your returns are quite paltry.

    4% is a little pessimistic if you were choosing good dividend yield stocks. 7% is reasonable and 10% over the long run is less reasonable.

  8. Aryn on November 9th, 2009 3:06 pm

    Karl, I hope 4% is pessimistic, but I think it’s better to plan pessimistically and then be pleasantly surprised if you have extra come retirement. I worry that if I expect 7%, and then the market underperforms, I won’t have budgeted properly.

  9. David on November 28th, 2009 9:17 am

    If you have credit cards then you can make a guaranteed return of 10 percent on your money by paying it off. If you pay off your mortgage then you get 6 percent.

  10. Jack on February 25th, 2010 8:24 pm

    I agree with David. The only money you should be investing in the market is money that is being matched by your employer in a company sponsored 401ks/403B/TSP until you have paid off your credit cards. Credit card debt carries high interest rates (10-25%). If you are sinking money into the market while exposing yourself to credit card debt, you are simply gambling in a hope to beat your credit card interest rate.

    Follow these simple rules before investing in retail trading accounts. It is wise to follow them in the order presented.

    1. Contribute to your 401ks/403B/TSP ONLY up to the amount your employer matches.
    (If they match say $3000 a year then contribute $3000. At the end of the year they will deposit the matching $3k and you’ve just make 100% on your money!)

    2a. Pay off all credit card debt.

    2b. Accumulate a 4-6 month security net in a high yield savings account.

    3. If you own your home, be able to make 1 extra payment per year. (this reduces a 30 year loan by 7-9 years depending on the loan’s interest rate)

    4. Once steps 1-3 are complete, determine if you are eligible to open a Traditional or Roth IRA. If so, open said account and contribute each year. These funds are for your retirement so do extra research to determine your risk tolerance based on age/family situation/health/etc (maximum contribution for 2010 is $5000/year)

    5. NOW you are ready to ‘play the stock market’ to see if you can beat the above argued 8% a year. So go ahead and open that retail stock trading account already!!! If you are able to complete steps 1-4 you are probably financially savvy enough to outperform the market. Best of luck!

  11. Aryn on February 26th, 2010 11:00 am

    I would amend step 3 to apply only to people who plan to stay in their home for more than ten years. If it’s likely or possible that you’ll move in 7-10 years, there may not be as much value in paying down the mortgage when you could use the money for savings or investing. The plan above would have the average person saving only $11,000 a year for retirement. That’s not enough.

  12. Seth on April 14th, 2010 5:17 pm

    I disagree the 7-10 year idea. By paying an extra payment a year for 5 years, when it came time to refinance my payment was lower because i had a better rate and less principle.

  13. Dan on May 20th, 2010 5:20 am

    Also, keep in mind that an “average” return is quite often not calculated as the geometric mean. For example years where the stock market went +100%, -50%, +100%, -50%…the conventional average would be 50%. But any grade schooler could tell you that you wouldn’t have gained any ground. Geometric mean would be 0%.

  14. Zeb on September 1st, 2010 7:26 am

    Watching a select number of stocks, anyone should be able to make a 5% return per MONTH. Think about it, buy a $20 stock when it is ready to rise and put a Good til Cancelled for $21. It’s not rocket science. Stock Brokers/Advisors make their money by making you believe the market is too complicated. Its not!

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  16. Swanny on December 12th, 2010 11:38 am

    Just calculating the return on a pension (managed by a large investment company). I have made regular monthly payments over the last 17 years. Initial rough calculations are looking like 3.5% gain over this period of time. Will update when I have finalised my calculations. (Would probably have been much better buying/letting a property)? Hindsight!!

  17. DavidD on January 19th, 2011 12:14 am

    I guess I got lucky. I just calculated my little account and it seems I beat the odds. I’ve earned and average of 19% since 2008, that includes taking a failed chance on MTLQQ (sold that dog). I read a little (very little), and if I like it, I buy it. I’m not a big investor but I enjoy the game. Wish I had thought to play back in 1974. (you know Microsoft) Then Warren and I could hang together. 60 and still kicking!

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  19. Eddie Orman on April 6th, 2011 3:02 pm

    You’re right in that no one can guarantee any specific return…or any return for that matter. Anyone who does should not be playing with other peoples money. You had a lot of great points I had never even considered… thanks for another great post.

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  20. Hunter Henry on February 1st, 2012 9:36 pm

    Oh come on. I was able to make 20% in 3 months when I was back in high school. If you have a very diverse portfolio and study stocks very carefully, you can be very successful. An extremely strong background in mathematics also helps a lot.

  21. Steve on June 5th, 2012 4:44 pm

    CD’s and Bonds return a lower percentage than inflation plus taxes, so never do those. Over the last 50 years the stock market has averaged 7% above inflation. Get your money into some mutual funds with a good 5-10 year history and leave em there.

  22. David on September 27th, 2012 5:31 am

    I have been holding at 8+% for quite a while. I must be doing something right. Of course I was at nearly 30% before the bust. AIG made me cry with their reverse 20-1 split.

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