The Truth About Stock Market Returns

You’ve likely heard from gurus like Dave Ramsey that if you’re invested in the stock market you should expect 12% returns over the long haul.  Yes, there have been times in history in which the average returns have seen double digits, but how has it performed lately, and what does it look like going forward?

As you’ll see below, the last 20 years in the S&P 500 with Dividends has averaged 7.1% annually, but the actual return was 5.6%.  The difference is due to the larger impact that negative years have compared to years of positive growth.  A 50% drop in the market requires a 100% gain to just get back to where you started.  However, the average return would be a positive 25%.

Add to the fact that these returns do not factor in the external costs of taxes, fees, opportunity costs, and the stealth tax of inflation.  Once those wealth eroding factors are included, you may be back to where you started while having to deal with the volatility, risk, and lack of access to your money along the way if using qualified plans such as a 401k.


So what does the future forecast hold for investors?  Unfortunately, based on Vanguard chief investment officer Greg Davis, it likely is not going to get better.

“If we look forward for the next 10 years, our expectations around U.S. equity markets is for about a 5 percent median annualized return,” he told CNBC back in February.  To read the full Vanguard report, click here.

So what can you do going forward?  For starters, we can heed the advice from Greg Davis to save more.  Where you save does matter.  Additionally, it would be wise to start considering alternative investments uncorrelated to the stock market to help grow your wealth to outpace inflation.