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.