It’s interesting that I drafted this post 3 or 4 weeks ago, just before the current wave of stock market crashes hit us; now, of course, I am ‘preaching to the converted’ …
I agree with you about the number. However, think you should use real rates of returns not some theoretical possibility. For example your number on mutual funds is 9.5%. Well actual rates of returns for individuals investing in mutual funds averaged 4.4% over the last 20 years (Dalbar, Inc. Vanguard, etc.).
So, what are the average returns for the stock market?
First, define the ‘stock market’:
Do you mean the US market? International (if so, which country or countries)?
If US, do you mean large cap (the stocks with the largest total stock market value or ‘capitalization’)? Or, small cap? Or, do you mean stocks listed one one of the alternative exchanges such as NASDAQ?
Or, do you simply mean ‘all’ stocks listed on the New York stock exchange (NY Composite), or ‘only’ 5,000 stocks (Wilshire 5000) or perhaps ‘just’ 2,000 of the listed stocks (Russell 2000)?
If ‘large cap’ do you mean the top 500 stocks listed on the NY stock exchange (S&P 500) or perhaps the just the largest 30 (DJIA)?
The point here being that there is no such thing as an ‘average return for the stock market’ … you have to decide how you want to slice ‘n dice it first!
Semantics aside, let’s pick an Index – say, the S&P 500 – how has it performed?
Pick a Number!
10 years too short?
OK, let’s find an online calculator and see how the S&P 500 performs over various 25 year periods:
In case you can’t read the diagram:
The best 25 year return (since 1871) for the S&P 500 was 17.6%, but the worst was 3.1% .. yah think that might make a difference if you your whole damn retirement strategy was hinging on achieving ‘average’ returns?!
BTW: If, you were ‘lucky’ enough to get the average, it was 9.4% …
… but, here’s the problem:
In ‘real life’ people don’t get the average!
Firstly, they rarely choose the S&P 500 … they usually gamble on just one or just a few Mutual Funds that used to perform better than the market (but, rarely ever do again).
Secondly, they pay fees that knock down returns by an average of 1.5%.
Thirdly, even if they do buy into a low cost Index Fund that tracks (say) the S&P 500, they actually rarely stay the course for the full 25 years (take another look at even the 10 year chart, above, if you want to see what that can do to the reliability of your returns).
Don’t believe me?
Check out the Dalbar Study
… then, scroll all the way back to the graph at the very top of this post:
Pictures really do tell more than a 1,000 words 🙂