What rate of return should you expect to earn on your investments?

***Updated through January 8, 2021

Early in my career, I was indoctrinated with a very powerful phrase “the stock market has averaged 12% over its history.” That phrase stuck in my head, and even made its way to my mouth very early in my career. But is it true? And if it is true, does that mean that people can expect to earn 12% per year on their investments? The answer is that 12% is a ridiculous number. But if 12% isn’t a reasonable rate of return on the money you invest, then what is? I think you will find that recent history (the last 25 years) has proven it’s much less than you think.

***Don’t be put off by all the charts and numbers in this post. This is a very easy concept to understand, and it’s very important that you understand it. If you don’t understand something that you see here, leave a comment in the comment section, and I will answer your questions.

First, I think we need some perspective. There are some things that you need to understand before my ultimate point will make any sense.

  1. 1. You need to know how/why an investment actually rises in value. When you see that your investment account went up over any period of time, it’s because one of three things happened. Those three things are: income was paid on the investment in the form of bond interest or a stock dividend, there was a realized gain (meaning investments were sold after they appreciated in value), or there was an unrealized gain (investments that you are still holding went up in value. In most instances, your investment account goes up because the investments within the account (stocks, mutual funds, bonds, etc) went up in value. This means that the demand for these exact securities was rising during the time frame. If your account went down in value, it’s most likely because the individual securities were deemed to be less in demand (based on perceived value). In reality, the only reason that your investments are worth anything at all is because someone else is willing to buy them from you.
  2. Your goal is to keep pace with “the market.” This means that your long-term investment account should keep pace with what the standard stock market indexes do, in terms of performance. BTW, when people say the market, they usually mean the S&P 500 or the Dow Jones Industrial Average. An index is selection of stocks that are used to gauge the health and performance of the overall stock market. For instance, the S&P 500 has 500 different stocks in it. If the market averages 4% over a tough 5 year period, then your investment account should do at least that well. If the market is up 24% over an awesome three year period, then your long-term investments should keep pace with this, assuming that you have at least a moderate risk tolerance. There are several reasons for this, but one of the primary reasons is cost. You may have heard in the past that you can actually invest in the indexes. This means you can buy something called an index fund, which recreates the stock portfolio of the actual index. These funds are usually dirt cheap. That means there aren’t many management fees involved. The more you pay in management fees, the less of your investment return you get to keep. Do you see where I’m going with this? If your investment account can’t keep pace with the index, and the index generally has lower management fees, then you should just own the index funds. If you are considering hiring a professional to manage your money, or even if you are just considering a standard mutual fund, make sure that there is a consistent long-term history of beating the market, net fees. The key in all of this is to beat the market without taking on unnecessary risks or fees.

The economy and the financial world have changed

We live in the modern economy. Our historical economy is nearly unrecognizable in the world today. Technology has brought efficiency, and efficiency has transformed our old economy into what it is today. Our financial markets are completely unrecognizable. Nearly all investment transactions are made by supercomputers in nanoseconds. Speculators and day-traders have flooded the markets and tainted stock valuations. Apple is a $1 trillion company. Whatever the 1930’s equivalent of $1 trillion was, Apple wouldn’t have been worth that in 1930. Apple, and its valuation are the product of our modern (not necessarily better) economy.

This is to say that we shouldn’t rely on historical data to drive our investing decisions. The industry line that you hear most often is “past performance is not indicative of future performance.” That’s true. And if that’s true, then past performance from 1930 sure as hell shouldn’t affect your investment decisions 80 years later.

Let’s look at some data. Below you will see the entire historical returns of the S&P 500 from 1926 through 2019. What you will see is that the S&P 500’s historical average hasn’t been 12% since 1929.  

What do the charts show? Several things, but among the most important things you will see is that through 2019, the S&P 500 had an average annual return of 9.70% and the 20-year average is 5.98%. That’s great. But I don’t think it’s realistic and useful for long-term planning projections. For example, in 2014 the 20-year average returned 9.76% per year. Is the 2019 20-year average more valid than the 2014 average? Which one should you use for planning? Even though 20 years is a significant period of time, it’s still greatly affected by big gains and losses.

These are the real numbers. Draw whatever conclusions you like. Me? I’m gonna pick and stick with 8%. Whether I’m projecting my own portfolio value or someone else’s, I’m gonna use 8%.

In fact, if you want to be safe, you should go ahead and operate on the premise that the S&P 500 averages 8%. All of your long-term planning decisions should be based on this, and nothing higher. Unfortunately, many investments, insurance, and retirement projections that are used to sell products and concepts are based on several averages higher than 8%. This is a shame. Especially when the consumer has absolutely no concept of what the real averages are.

I took some time this week to ask some industry colleagues their thoughts on this issue. Some still show 12%, some show 10%, and a great deal of them show somewhere in the range of 8%.

“If someone is relying on a 12% return to get them to retirement or pay for their kid’s college and that return doesn’t materialize, they are in a world of hurt with very limited and unattractive options. 7% (assumed rate of return) allows me to focus on what a client can control: their savings rate,” noted one fee-only financial advisor.

That guy is right. The key to this whole equation is being conservative with your return estimate, and instead concentrating on what you can actually control, the savings rate. So in a nutshell, my opinion is that you would be fortunate to average around 7-8% rate of return over a long-term basis. There will be periods in which you get a 20% rate of return.  These are the great times. But there will also be times in which you are getting a -15% rate of return. The 5-year average for the S&P 500 from 1995-1999 was 28.56%. That is just freaking ridiculous. Honestly. People TRIPLED their money in just five years. But this is where the market can be a fickle beast. That “tripled” initial investment from 1995, was reduced by -9%, -11%, and -22% in the following three years (2000, 2001, 2002). $10,000 turned into $35,111.31, and then was reduced to $21,904.12. Sidenote: This was also the advent of day trading.

If you ever want to retire or fund college for your children, then you will need to invest your money in something. Does that something have to be the stock market? No, not necessarily. But if you do use the stock market, proceed cautiously with reasonable expectations.

***Updated through December 31, 2019

51 thoughts on “What rate of return should you expect to earn on your investments?

  1. Very good article about investing in stocks. The data in the table certainly shows that timing has always been a key factor to generating acceptable returns on stock investments. Look at the disparity of the average annual returns shown for 2011 over 5 years (-.25%) and 10 years (2.92%) vs. 20 years (7.81%).

    Great post.

  2. The paragraph after the tables of item 3. says the cumulative return is 7%. Try as I might I do not see where this number comes from. 10,000*(1.07)^10 = 19,671.51 which is not the result from either table. Explain please?

  3. Excellent question. I didn’t make my point very clear. I’ve edited the post to clarify. The math is ($31,058.38 (12% fixed total) – $28,971.99 (12% avg)) divided by $31,058.38. =6.7% difference between the two numbers. I rounded up to 7%.

  4. This whole analysis is bull; the average loss to investors in 2008 was not an annual return of 9.6%. From most analysts reports, the average investor loss was 40%.

    I’d like to see an explanation from reliable sources for the 9.6% annual gain in 2008.

  5. Another issue is the fact that people over 70.5 years old must withdraw funds, so the accumulation present is not realistic.

  6. Another question about your rate of return. Most financial pundits suggest that the older one gets, the shift from equities to bonds should increase. How do you account for the kinds of rate of return shown on your post for the older generation?

  7. Bull it is not. You aren’t reading the chart right. I have the 2008 annual return as -37%. The average is the running average for the history of the market. The number you are referencing is the running lifetime average of the S&P.

  8. Returns are returns. I never suggested that people of any age invest in the markets. That’s not the point of the post. Bond rates of return are different, and aren’t reflected on this post because this post is about the S&P 500. Tak, thanks for all your comments on this post. Do you have any more questions?

  9. Pete, not sure how I found your blog but it makes me want to hug you! This really gives a more reasonable view of what to expect! Thanks!

  10. Thanks for the info! Right now I am invested in a fund that’s 60% stocks and 40% bonds. Should I be investing in a fund higher in stocks? I think this is for the long term and I am 35 years old. Thanks.

    1. I’m no real expert but for long term you basically always want to go heavy in stocks. Maybe as high as 90/10. As you get closer to retirement or whatever the money may be for you move into higher bond percentages. There’s no reason to be too risk adverse until you get into your mid to late 50’s or even later if you will retire later. Even if you hit another 2008 style recession 5-10 years before retirement you should recover just fine before you need the money. The worst thing you could do though would be to hit a recession 10 years before retirement, panic, and throw it all into bonds. Then you really will never recover.

      1. No, go 100% stocks/mutual funds/ETFs as long as you can. Even at 35, you’re bound to hit at least one bear market and one bull market run over the next 25 years. Stick it all in market mutual funds that are low fee and closely trail the market averages. 5 and 10% of your salary is a good starting point. If you can put a small portion (let’s say another 1-10k per year) into EE or I Fed savings bonds by the time you’re 40, you’ll be set by the time you hit 60-65. you can live on a mix of social security and the equity from the stock funds from 60-70 until the bonds mature and then you can just live off a mixture of the 3 long term.

    2. I believe it depends on what kind of drawdown you can live with. If you can stare at 40-45% declines without batting an eye or selling all your stocks, then go 90-100% stocks. If that’s just not in the cards for you (know thyself, as Shakespeare wrote) – then it might be wise to stick with the 60/40 portfolio. There’s a reason the investing greats tend to reference it – solid returns with modest variability. When I was younger I was 100% in stocks right through the 2001-3 decline, but held on and did fine overall, so it can be done, but I was taking far more risk than I understood. If I had to do it over again, I’d likely just throw 15% in intermediate gov’t bonds and 5 in longs to offset an 80% equity portfolio for my 20’s and early 30’s. I didn’t do badly… after fees, my CAGR was about 20 bpts less than the S&P 500 covering 20 years (which is a convenient measure, but probably not the right benchmark.) However, I’m now in a 60/40 portfolio (& in my late 40’s) but tilted towards some high-return segments of the market. I wouldn’t be averse to a 75/25 portfolio at my age, but I like my asset allocation for too many reasons to go into here. Among the ‘lazy portfolio’ suggestions, Swenson’s ‘yale unconventional’ is a bit more aggressive (70/30) with strong returns and about a 25% max drawdown.

      1. Brilliant information! Most especially for a novice in the investment market like me. I am in my late 20s and i just wanna start investing my earnings on securities.
        I only have theoretical knowledge on investing due to the fact that i’m an international business management student but i don’t have any idea on investing in securities.
        I will welcome any word of advice or any recommendations on this platform.

  11. This is so what my gut has been telling me for so long, thanks! Nice to hear it from a professional in the industry. You don’t have to be in the game if you’re happy with smallish returns but not much risk. This is especially true as we may be entering a deflation period. I look forward to reading more of your advice on how to improve returns.

  12. When discussing an average return, one should always use a geometric mean instead of an arithmetic mean. That is why your numbers don’t match up in the first example. This very simple error limits your credibility…

    1. Jeff,
      You are EXACTLY right. First, I hadn’t checked this thread in a while, so I didn’t see your comment. Second, I have NO IDEA what in the hell I was thinking. Thanks for calling it to my attention. I’ve amended that section of the post.

    2. Statistically speaking one error among many valid points does not limit ones credibility. Great article and glad to see Pete is open to corrections. Sad to see others focusing on small details miss the point of the article.

  13. Jeff, When you say a geometric mean do you mean multiplying all the #s together and then taking the nth root of how many #s you used? Instead of just adding them together and dividing them?

  14. @lereybishop:disqus

    That is what Jeff meant.

    The author, Peter Dunn, took an arithmetic average, i.e. he added up all of the 10 percentages and divided by ten. For obvious reasons, this isn’t how averaging returns are done. In a very contrived, simplified example, if you earned -100% one year and 124% the next year then by Peter’s math you will have earned

    (-100+124)/2 = 12%

    average interest. But clearly you’d have zero money since you lost it all in year one, which is not an effective interest rate of 12%.

    If we correctly averaged these numbers, using the geometric mean, we could do the following: First I’m going to calculate the multiplicative factor you would use to achieve the interest rate, for example if you earn 10% the factor would be (1+.10)=1.1.

    Then multiply them all together and take the tenth root.

    (1.36)(.88)(1.06)(1.18)(.98)(1.26)(1.12)(1.12)(1.19)(1.05) = 2.89719935408

    The tenth root of which is 1.112238 which corresponds to an average return of 11.2238%.

    11.2238 does not equal 12.

    TLDR; The author did not correctly calculate effective annual return. I don’t mean to be excessively cruel, but this person who is purporting to be a financial adviser does not understand how rates of return work – something that is taught in pre-calculus, which is absolutely a prerequisite to any sort of economics or finance degree. I would seriously reconsider taking advice from someone who would make such an elementary mistake. Retirement planning is too important, seek the help of a CFP or at least a better blog.

  15. There better be a damn good return if you can’t touch the money for 30 years is all I know. I don’t believe the economy is in as good of shape as the government says. I’m waiting til the bankers crash it again to get in. They’re playing musical chairs and when a lot of people are set to retire they pull the plug.

  16. I have spent what feels like a lifetime learning to trade. I am getting 10-20% ROI per week. I would match my trading against anyone’s in the world. Trading? Trading is extremely hard work.

    1. 10-20% per week? Just using 10% as a base, doesn’t that calculate out to about 142% annual within the first year (reinvesting and compounding your gains of course)? If I continued your success for a little while longer it gets even more impressive. If I gave you $1000 today you could compound it over time and by the end of 2018 give me back the gross domestic product of the United States? Have I missed something?

  17. This 8% number would be based on 100% Equity Portfolio (High Risk Tolerance, Growth oriented). What about other risk tolerances. Also, this doesn’t take into account Management Expenses (for mutual funds or segregated funds) so should we subtract 1.5%-3.5% off the 8% ?

  18. I have always been baffled by “10% ROI is great annually!”……….no…..that is piss poor. Any trader who is worth his salt should be up in the 30% ROI annually (consistently). I average roughly .75% weekly. Some weeks i loose 1, some weeks i gain 3, but all in all its not a very hard game….

    1. No ideas about the accuracy of your claims for your returns, but the reason is a fairly straightforward one.

      Mutual funds, index funds, etc., do not participate in the risky behavior that leads to those huge gains (leveraging, shorting etc.). Some of it is risk tolerance for their clients, and some of it is simple wealth reallocation. These banking houses and investors are using your investment as their bond/currency, while using those risky investment strategies as their stock market/etf/index etc portion. You get 8-10%, are told to be happy, and they get 3 times that. You can retire at the same level that you worked your life for, and they can retire on a yacht.

      In a way I am OK with this, they should be compensated for this work (although seemingly simply buying the DJIA would return fairly close to what they are ‘doing’), but I would prefer it if I could buy into what they are doing at a higher accepted risk and management fee.

  19. Given the current political environment, do you still think that 8% is a good rule of thumb for the future, and if so, how long do you think you can count on that?

  20. I am considering investing for the first time. I was told that I should be satisfied with a 3% annual real rate of return. But from what I have read thus far, it does not seem to be the case. Any advice?

  21. what are your thoughts on mutual fund that has averaged about 4% (net professional fees) since inception about (35 years)?

  22. Pete, would be interested to know your best investment strategy for someone who has a large sum ($3M+) to invest at age 62 and wants the principle to grow or at least not decrease over a 25-yr. period, while yielding a high annual interest to live (very comfortably) off of.

  23. Hi Pete,
    In reading your article and the following questions, is it accurate to say:
    8% avg for 100% stock investment – no advisor or mutual fund mgr fees

    If using 100% stock and using an advisor + mutual funds, one should likely use 5.8% – 6% as the avg rate of return.

    If someone is using a balanced portfolio with a 1% advisor fee, what would be the expected return of investment to use in determining retirement figures?

    Thank you – CMF

  24. Pete,
    my man….you are ALMOST speaking my language here. First, I am a scientist/chemist turned financial analyst. So, I love numbers, data, spreadsheets, etc. and completely geek out on financial planning. So, seeing you post these numbers resonated with me, as I have used the exact same charts (available similarly on Wikipedia entry for the S&P). So, as I am reading, I am checking things off the list that I also have used in my thought process, historical rate of return (keeping in mind no guarantee, but, hey, we have to make assumptions in planning), CHeck, HRoR based un different relevant time periods, check, analyze data presented, in a logical way and…use a number you make up anyway! What the…! WHy not use 9.85 or 9.62 , an annualized return that is relevant to your time horizon? I get being conservative…but, hell why not 7? Why use data, only to make up a number in the end? Like I said, we are almost there. 🙂 Either way, I like your approach. Personally, like I said, I use the exact same approach as you, but for me the relevant time horizon is approximately 25 yrs, so I use 9.15%. That is the lowest historical 25 yr annualized average.

    1. Hey Steve,
      Trust me, I battled with your exact point for a very long time before I wrote the post. My decision was definitely tainted by my time in the financial industry. Back in the day, some people would illustrate 12 percent, and the whole financial world wanted them to walk the plank, as they should. Then, compliance offices all over the country begins to squirm when you illustrate anything over 6 percent. I realize by gathering the data, finding the real average, and then arbitrarily choosing a different average, I’ve basically just crapped on the average. But I did it because although it doesn’t pass the statistics sniff test, it does pass the financial industry compliance sniff test. It’s a weird decision.

  25. Thanks for this post!

    This may sound like a ridiculous question, but I’ve never invested in my life and I’m seeking various options. I’m also not a mathematical guru, so I’m in the baby steps mode and much of how this works is still is beyond me. Perhaps you could help.

    Can you provide a mathematical example on how to calculate a potential return?

    For instance, You invest 5,000 and the rate is 7%, what would it be in 1yr, 5yrs, etc.
    And can you show how you calculate that?

    I know it depends on the market, but would like a hypothetical scenario.

    Additionally, is there a time limit, penalty, etc. on pulling your funds out.


  26. These are all nominal returns, right? Deduct 3 percentage points for average inflation. So plan around 5% real return, right??

    1. Yes, I believe the article does just address nominal and not real returns and 3% inflation is a reasonable planning assumption. However, planning your retirement based on the numbers in this article would be ill advised. While I accept that the writer notes in one of his responses that he is merely addressing the S&P 500 in his article, the title is nevertheless misleading. “What rate of return should you expect to earn on your investments?” should specifically state S&P 500 or stocks in general.
      Most people balance their investments and anyone planning for retirement would be well advised to (1) evaluate their risk profile and (2) invest in a portfolio of investments that matches that profile. In just about every case that will mean that stocks only make up some percentage of your investment portfolio with traditionally lower yield investment instruments such as bonds and cash providing risk protection but lower returns.
      The following quote in the article “If someone is relying on a 12% return to get them to retirement….and that return doesn’t materialize, they are in a world of hurt….” Is true but I would suggest that if anyone is planning for retirement and has their entire portfolio invested in S&P 500 stocks (or 100% stocks in general), then they will end up in a world of hurt at some time anyway, regardless of the return percentages they assume. If you have a 25-30 year time horizon then you can sustain a major stock market event but if you are in the final 5-10 year run-in to retiring, it could be catastrophic.
      I am sure the writer would not disagree with any of that but the point is that the article could be seen to suggest to the uninitiated that they can rely on the return figures stated and fails to point out that having all of your investments in stocks is risky and not advisable in the majority of cases.

  27. I’ve been using the rule of 3 (Formally the rule of 4) basically that money properly invested will return me 3% of the investment AFTER fee’s, inflation and taxes and not get into the principle. I have 4 years “hold on” cash to cover my living expenses during down times so that I can not draw money out during the bad times.

    Any thoughts on this?

  28. Very much enjoyed hearing from a fellow market “contrarian” – in the sense that you are willing to challenge so-called common knowledge. I did the exact same thing in regards to the magical 12%; my piece of wisdom was that “money doubles every 7 years” (finally, math I can do in my head 🙂 10%).

    Another warning market investors need to understand is that long-term averages don’t mean squat if their early into their retirement and we enter a real bear market, let alone a recession. If you’re able to afford to lose 20-50% of your Investment Income and still not touch your principal, then you’re fine; always bear in mind (pun intended) these downturns often last years in and years out.

    I find it tragic how ill-informed people are when it comes to wealth creation and retirement; lest I wane on philosophically I will close with this – the tragedy of the ill-informed is that they end up being our nation’s “bagholders” and they never stood a chance.

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