The TRUTH About Stock Market Returns

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What was the average annual return of stocks over the past 5 years? How about for the past 20 years? What was the return for a 60/40 stock and bond mix portfolio? There are a lot of numbers thrown around on how stocks have done – and will do in the future. Let’s dig through the noise and see what the actual data tells us.

The Truth About Stock Market Returns

 

What portfolio investments are we looking at?

Three Different Investment Portfolios minFor this post I reviewed data for three different portfolio mixes:

  1. 100% invested in a Total US Stock Market Fund
  2. 80% in the same Total US Stock Market Fund and 20% in a Total US Bond Fund
  3. 60% in the same Total US Stock Market Fund and 40% in a Total US Bond Fund

The reason I’ve looked at these three portfolios is that few people are invested 100% in stocks.


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Financial writers and speakers love to talk about “the market” but your results may not match what they’re talking about. If you have bonds mixed in with your stocks you’ll see a different average rate of return. Similarly if you mix in some International Stocks, or a Small Cap Fund, etc. Since the portfolio options are unlimited, I decided to focus on “the market” and two very common stock/bond ratios.

Timelines

In addition to three different portfolios, we’re looking at six different timelines. We’re looking at the most recent 12 months, and then the 5, 10, 15, 20, and 30 years leading up to the time of writing this post.

Why?

Length of time invested matters, as you’ll see shortly.


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First a warning

I feel the need to remind you of two things.

1. Past performance does not guarantee future results. It’s great for looking at trends and perhaps estimating what the future might hold, but nothing is ever guaranteed.

2. The shorter your investing timeline, the more wild the results may vary. Looking at rolling returns (I explained rolling returns in another post) 1-year results have HUGE swings but 40-year results have a much smaller range of results. So the shorter your investing horizon, the harder it is to estimate what your returns might be.

Here’s a chart of the all previous 1-year stock market returns

One-Year Historical Rolling Returns (S&P 500)

And here is a chart of all the previous 40-year stock market returns:

Forty-Year Historical Rolling Returns (S&P 500)

So just because last year was a great year doesn’t mean next year will be. In any given one-year period stocks might go up 50% or down 50%. They’re twice as likely to at least be positive, but still, we don’t know.

On the other hand long-term (40 years) historical results have always been positive and land in a much tighter range.


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Takeaways:

EXPECT market swings and accept them as a normal part of investing. Don’t freak out. Don’t sell. Just accept that it is going to happen short term.

Don’t invest in stocks if you need the money back in a couple of years. That’s more gambling than investing. But if you’re planning for retirement, it’s worth considering. Especially when the average retired person is still going to live another 20+ years after they retire. That’s a pretty long period of time that they’ll need their money to last. Some amount of stocks will help that happen.

How have these portfolios performed?

Below is a chart of the returns. The first column shows the year the money was invested into the portfolio, the second the length since that year, and the other three columns have results for each of the portfolios.

 

Various Stock Market Portfolio Returns Over Years - Charted

As you can see, none of these portfolio returns are horrible.

Almost by definition the portfolios that have bonds mixed in have lower performance results.

The portfolios that were invested within the five years leading up the Great Recession have the smallest variance between the all-stock and bond-mix portfolios. Makes sense since during downturns bonds don’t fall as far or as fast – often they’ll even go up.

I find it interesting, and very encouraging, that even money invested right before the Great Recession (which started December 2007) has shown better than a 7% a year average annual return. So money invested at a peak, right before a crash, is still way ahead 10 years later.


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By the way, in case you don’t know this, money invested at a 7% return will double every ten years. So a 7% return is pretty nice. Not as nice as some of those other rates, but REALLY nice considering it is the worst of the returns analyzed.

Is there a takeaway for you personally?

Again, past does not guarantee future. But here are some points that I draw from this exercise.

1. YOUR investment returns will depend on your portfolio mix

Dave Ramsey telling you to expect 12% returns are just as wrong as the CNBC commentator saying to expect 4%. They don’t know your portfolio mix or your timeline.

The more bonds you have, the better you’ll do in down markets, but the total average returns will likely be less than a portfolio with more stocks.

It’s okay to have bonds though. You’re still seeing decent returns. If those returns allow you to meet your goal, and you have less volatility, that’s great!

2. The last few years have been GREAT for stocks.

14%+ per year for the last five years is an incredible rate of return!

It can’t go on forever of course. And a lot of that high return is because the market was recovering from a crash. Still, if you weren’t in the market these past five years, you missed out.

3. Even investing AT THE WORST TIME worked out well.

If you put all your money into the market in 2007 and just left it alone until today, you’d have double the amount of when you started.

Don’t try to time the market and don’t sell when values are down (unless you need the money).

4. Invest money you won’t need for MANY years.

If you need your money back in a few years, even as few as five, putting it in the stock market might not make the most sense.

The shorter the timeline, the larger the potential swing of results.

What do you think?

Does any of this surprise you? Do you have any questions? Comments? Just let us know in the comments section below.

 

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11 Comments

  1. Grant @ Life Prep Couple September 4, 2017 at 2:40 pm - Reply

    A little surprised the 60/40 split isn’t further behind the 100/0. That is pretty nice to make 8%+ while having that much safe money.

    That is pretty cool to think that even if you invested at the worst possible time in 2007 you still would have doubled your money. I believe it is Warren Buffet who says if you think the stocks are expensive now just wait 10 years.

    • Brad Kingsley September 4, 2017 at 2:53 pm - Reply

      I know Grant – I was thinking the same thing! I really thought the 60/40 would be WAY behind. It has me rethinking some stance on bonds. I continue to believe that someone with 15+ years before they’ll touch their money is a no-brainer for heavy stock allocations (90%+) but when getting closer to needing the money, lowering risk with minimal impact on returns might make sense.

  2. Amy @ Life Zemplified September 4, 2017 at 10:15 pm - Reply

    I too am a little surprised about the 60/40 mix result, but it is a good one to see. Should help those very close to or in retirement, feel a bit more comfortable with making a similar allocation.

    • Brad Kingsley September 5, 2017 at 11:03 am - Reply

      I think it surprised us all Amy. Good to know for sure. Thanks for stopping by and commenting!

  3. Lance @ My Strategic Dollar September 5, 2017 at 12:34 pm - Reply

    Thanks for the analysis! Good to know that 60/40 gets a pretty darn good return. As people get older, they must shift to focusing on keeping more of their money instead of risking it, so it’s good to know the return for each of the scenarios above!

    • Brad Kingsley September 5, 2017 at 2:39 pm - Reply

      I agree Lance! Good to know that a 60/40 portfolio still has decent returns.

  4. Mr. FWP September 7, 2017 at 3:49 pm - Reply

    Great information – thank you for running the numbers and publishing them effectively. I’d be interested to know what a 2009 portfolio did (relative to a 2007), and ditto a 2003 or 2001 one.

    Anyway, excellent takeaways from an excellent write-up. It’s always a great reminder that stock investing is long term. Had someone asking me about it very recently who might want to pull money soon, and I immediately cautioned that stock investing is only for those who *won’t* want to pull their money out soon.

    • Brad Kingsley September 7, 2017 at 6:11 pm - Reply

      That would skewed data because it is working from the bottom of a correction. At the same time, these are skewed a bit lower since they start right before a correction. I think starting at a peak though is “safer” if looking for numbers to use in someone’s estimates. Having a near-term correction (i.e. sequence of returns risk) is always a possibility so calculating that into the mix can be useful.

      But here’s how the numbers look: 14%, 11%, 8% from 2009 – and very close (half a percent or so) to those same returns if we started in 2001.

      • Mr. FWP September 9, 2017 at 11:00 pm - Reply

        Thank you, Brad! Yes, that’s exactly why I was curious: I knew you picked the safe/low end so that folks would be expecting what’s relatively safe return-wise. Smart call, rather than inflating expectations. You gave me the numbers, and that reveals what I assumed: it’s even better if you picked a great year. But who knows whether this is the top or the bottom; it’s even more comforting to know we’ll be OK either way.

  5. Military Dollar September 10, 2017 at 1:51 pm - Reply

    Great post. I personally am putting 100% of my contributions into stocks right now, but that’s because my aggressive FIRE timeline can really benefit from an extra percentage or two in returns. My post FIRE allocations will be different.

    I’m always urging people to look at the actual numbers instead of letting fear dictate their actions. I’ll be sending people your way. Thanks!

    • Brad Kingsley September 10, 2017 at 6:41 pm - Reply

      Thanks MD! I agree with that reasoning for sure. Until we reached FIRE ourselves, we were 100% in stocks. In fact, just now (3 years after FIRE) we’re changing our portfolio to make it more conservative.

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