What is the Average Return of the Stock Market?

Billy Toh

January 17, 2022

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Many people may wonder what the average return of stocks is over the long term. Well, the average stock market return has been about 10% annually over the past 50 years (if you exclude the past three phenomenal years for the US market).

The S&P 500 Index, which tracks the stocks of 500 large-cap companies in the US, is usually seen as the benchmark for the overall market.

In Singapore, the Straits Times Index (STI) is a market capitalisation-weighted index that tracks the performance of the top 30 companies listed on the Singapore Stock Exchange (SGX).

The STI’s 10-year average annualised return was at 9.2% prior to the pandemic.

Although the average return of the stock market is usually around 10%, the return in any one year fluctuates.

It is also important to keep in mind that the long-term average return of 10% does not take into account inflation.

With expected inflation rising this year, investors can expect to lose some of these real returns from higher inflation.

The stock market return isn’t usually average

However, there are no guarantees in the stock market, but the 10% average return is traced back over a long period of time.

Yet, historical data tells us that the returns in any given year for the stock market are usually far from their average.

For example, between 1928 and 2021, annual returns were in the range of 8% to 12% only seven times.  The rest of the time, they were much lower – or higher. Volatility is expected of the stock market.

Despite the volatility, returns tend to be positive in any given year. While the stock market does not increase every year, historical data show that the market has gone up in about 67% of the years since 1928.

This means that the timing of the market is not as important as perceived.

However, the quality of the companies invested in is important as the benchmark index usually tracks the large-cap companies in the different market.

Be realistic with stock market returns

There are various factors that affect the stock market return. For example, the stock market could react to negative geopolitical developments, inflation, policy makers decisions, change in economic growth dynamics, investors sentiment and other external factors.

It is impossible to predict how the stock market will perform in any given year but if historical data is any indication, the stock market tends to increase in value from its previous year, and the long-term average return is at about 10% annually.

This return has not taken inflation into consideration so the real return could average at around 7% to 8% annually.

According to Benjamin Graham:

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.”

This is important as we enter 2022, a year of transition to normalcy.

While the S&P 500 has generated an average return of 24.0% over the last three years, investors need to learn to temper their enthusiasm during the good times.

A down market is also not the end of the road for your investing journey as it offers opportunity for you to buy stocks at attractive valuations and anticipate higher future returns.

Statistics show that every 10 years, about seven of those years  you’ll see the stock market rise in value.

Is it the right time to invest?

Most people always ask if it is the right time to invest in the stock market. The answer varies based on our near-term assumptions on developments that would have an impact on the economy and capital markets.

I think that the effort to time the market is futile given the variables that affect the movement of share prices in the near term.

The right question however is if the stock market’s long-term average return suits your needs and fits into your financial goals and objectives.

About the Author: Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.