What was the average annual stock market returns 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 wilder 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, the past does not guarantee the 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.