What Stock Market Returns Can You Expect?

One necessary ingredient in planning for your financial future is estimating how much your money will return while invested.  Since you can’t tell the future, the best thing you can (likely) do is look to the past.

But, you might say, “Past performance does not guarantee future returns!”  That doesn’t mean that past performance is useless…  as a matter of fact, if you’re going to guess what you’ll get for returns in the future, you should probably take a look at what the stock market has returned over time.

For your convenience, I’ve converted Robert Shiller’s S&P 500 data from 1871 until 2012 into geometric average trailing annual returns for 40, 20, 10, 5, and 1 year periods.  I’ve calculated both nominal returns and returns after inflation – and all results include dividend reinvestment.  (See all of our investment calculators here).  Enough said, here it is:

Historic Trailing Stock Returns

Historic Returns and Volatility

Want to know something interesting about the history of the S&P 500 Index?  The longer the time period:

  • The greater the chance the dividend reinvested S&P 500 returned a positive result annually
  • The less the volatility

That second point makes a nice visual result.  Here’s all of the trailing inflation adjusted returns presented visually:

Ordered 40, 20, 10, 5, and 1 year trailing geometric returns for the S&P 500.

How to Use This Data

This calculator will let you know if your estimated investment returns ‘make sense’, at least from a historic point of view.

This calculator’s results don’t mean that a given return is impossible to reach, nor does it set a floor on returns.  It’s possible, even if not probable, that you might even do worse than the returns indicated.  The data is best viewed as a guide, so you’ll know what is reasonable to expect in the future.  Remember: it’s better to be conservative and have too much money than overly optimistic and have too little.

This is also a tool you can use to check your asset allocation when you have specific savings goals.  For example, if you’re buying a house in the next year, the S&P 500 has only returned more than 0% after inflation 67.91% of the time.  The longer your investment horizon, the surer you can be you’ll have a positive return.

Methodology

The important thing to note is that the calculations to create this data were done assuming no taxes and no transaction fees, along with no management fees.  That said, you can read the whole methodology in the S&P 500 Return Calculator‘s methodology section.

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Comments

  1. krantcents says

    Although I love it when the market goes up I realize it also goes down. In the long term, the market performs reasonably and I am in it for the next 30-35 years. I try not to think about the short term.

    • says

      Yes, with a caveat – it never went down (assuming all the assumptions I spelled out) over a 40 year period, haha. You’re spot on with the time-frame, though – the longer, the better… and when you invest in stocks don’t stay there for the short term.

  2. John S @ Frugal Rules says

    Good post! It is so vital to remember that you need to keep a long term view of investments. Sure, you will have ups and downs in a shorter time period, and that I to be expected. I like the analogy that slow and steady wins the race. It’s not “sexy” by any means, but it generally gets the job done.

    • says

      Glad you enjoyed it – posting these things is a labor of love, haha. It took something like 4 hours to get this piece ready to post (for only 350 words, heh).

      Slow and steady, certainly. Even though 1 year periods have the opportunity to return absurd amounts, there is less of a chance of losing money the longer you’re in the game.

  3. Brick By Brick Investing says

    Completely agree, everyone’s situation is different but the number one rule is to have a strategy and keep your emotions in check. I know it’s easier said than done but it took me 3.5 years to master those two things.

  4. AverageJoe says

    This is why I always laugh when people tell me they’re buying stocks for a six month time frame. I always ask them why they don’t just head to the casino.

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